Valuations are Inching Higher

Digital Media Company Valuations are beginning to increase.  As seen in the chart below, the average revenue multiple for consumer digital media companies is 3.5x Revenue.  This revenue multiple is clearly below the lofty 5x to 10x revenue multiples of 2005 and 2006, but substantially higher than where multiples were at this point last year.  Although valuations are increasing due to a better economic outlook and advertising environment, do not expect a super-charged M&A environment.   Many transactions are going to involve strategic acquisitions with scale as well as small tuck-in acquisitions of current partner companies.  As Hearst’s acquisition of iCrossing for $375 million shows, CEOs are making large strategic acquisitions that take them to a new place with minimal scalability risk (healthy, profitable and growing).

On the other hand, larger companies will also continue cherry-picking small tuck-in acquisitions that complement their existing audiences by adding functionality or niche content.  For example, MSNBC acquired BreakingNews.com in January 2010, Time Inc, acquired personal shopping engine StyleFeeder in January 2010 and WebMediaBrands acquired social media site Rotorblog in March 2010.

The outlook for digital media M&A is more optimistic for 2010, but expect more selective deal-making.  This year companies have cleaner balance sheets and a re-calibrated strategic focus, which means that acquisitions will have to make business sense.  If the CEO cannot make a clear case for the strategic fit to her board, then she will be hesitant to take on the risk.

Where Have You Been 2010?

As noted in the 2009 Digital Media M&A Report, the year is getting started with a head of steam.  Valuations are creeping and M&A activity increased substantially in the second half of 2009.  More importantly, Peachtree is about to close its first transaction for 2010.

(Digital Media Report:  http://www.peachtreemediaadvisors.com/?p=research and
Greentech Report: http://www.peachtreegreenadvisors.com/?p=research)

This should be a big year for M&A, with a continuation of housecleaning as well as some strategic pickups.  Expect Google to continue making small acquisitions (I consider a $50 to $200 million acquisition small to them).  Also expect many more strategic acquisitions of partnerships.  Most CEOs know that they have to grow through acquisition, but are not ready to pull the trigger on acquisitions that are not core to their newly calibrated digital media strategies.  Smaller and profitable partners will be in high demand as acquisition targets due to their familiarity with boards.

As a smaller company CEO that survived the year, my advice is to clearly entertain these overtures.  Keep the conversation at a high “strategy” or working relationship level.  Let them know that you are committed to growing your business and getting after your plan.

By the beginning of the third quarter of 2010, when larger companies are looking at how they are going to finish out the year, that’s when the serious overture will begin.  At that point, you’ll clearly need a smart M&A advisor to help you maintain this relationship while running a confidential sale process to secure additional bids for your company.  Even though it is a friendly acquirer, it is always better to have more than one bid just to keep the buyer group honest.

We’re off to a great start in 2010 and look forward to hearing from you!

News Corp./Content Providers vs. Google, Round 394

Recently, Rupert Murdoch has public mused that News Corp. might start blocking its content from Google’s search results. As many of you already know, Google provides search results that link to content from News Corp. (and many, many, other providers), along with a brief summary of said content. Google gets ad revenue tied to these search results, and it keeps all of the money. However, Google contends that it drives significant traffic directly to the sites (on the order of 1 billion page views per month, according to Marissa Mayer), and it allows the content owners to then try to monetize this traffic in any way they deem feasible. Plus, content owners are free to block Google’s search engines from linking to their sites.

Everybody gains, right? Not so fast. The search results frequently contain enough content that viewers do not feel the need to click on the original news link. And, this system puts the control of the viewer in the hands of Google, not the news source, by disaggregating all of the news.

So what is the solution, if you are a content provider? You could do what News Corp. is contemplating, which is to pull your content. Would it really be worth it to News Corp to decrease its traffic in order to spite Google? Probably not, which is why nobody of note has done it yet. One solution that has been rumored is that News Corp. would partner with Bing, a Google competitor, in an exclusive arrangement: Bing gets increased traffic to its search engine, and News Corp. receives some compensation from Bing for this exclusive traffic. However, and this is a big however, many viewers would likely just continue to use Google and then go to non-News Corp websites for their information, except in cases where News Corp. has exclusive content. The only way that this would work is if all of the major news sites signed an exclusive arrangement with Bing (or whomever else). Then they would have a critical mass of content that drives users to a different search engine.

If push came to shove, would Google consider providing a split of some of its revenue to these providers to prevent them from joining the other side? Doubtful. My view is that there is so much news content out there, both from “professional” and “amateur (blogs, etc.)” sources that it would be very difficult to have a concerted effort large enough to make a dent to Google. Stay tuned…

Twitter — I mean, Web 2.0 — Expo

Peachtree has lately busied itself making rounds at November conferences.  Following a successful ad:tech NY 2009, we attended the Web 2.0  Expo last week in New York.  Introducing myself to other attendees at these conferences is always fun; the term “investment bank” more often than not elicits a response of discombobulation invariably followed by a valiant attempt to decipher the code: “Oh, like real estate investments.”  Anyway, I digress.  Since Elena has already provided a comprehensive recap of the ad:tech proceedings, I’m skipping over ad:tech to offer some Web 2.0 musings.

In contrast to ad:tech, which consisted of advertising, advertising, and (gasp) more advertising, Web 2.0 explored a plethora of topics ranging from social media to mobile to government 2.0.  And in case you were wondering, yes, much of the attention centered upon Twitter and Facebook, resident darlings of Web 2.0 as we know it.  To make sure you didn’t miss Twitter, the folks at Web 2.0 were so kind as to provide a theater-sized live Twitter feed behind the podium during keynote sessions.

Baratunde Thurstone, comedian and web editor of The Onion, then fed the Twitter-hungry attendees (“the twitterati”) a serving of hashtag lunch during a Wednesday keynote, which they promptly ate up.  In case you aren’t familiar with Twitterspeak, hashtags are a way of grouping tweets (#dogs would be a way of identifying your tweet as dogs-related), and also what Thurston calls “mini grassroots movements.”  Possibly offering more comedy than substance, Thurston used case studies of, amongst others, #SwineFlu, #WorldsThinnestBooks, and #RejectedPalinTitles to demonstrate the viral nature of hashtags.  If you can spare fifteen minutes of your life, the complete presentation is here.

Alas, the conference did not pass without hashtags rearing its ugly head as well.  The aforementioned live Twitter feed enabled audience members to broadcast tweets on-screen by applying the #w2e hashtag.  As tweets flooded the feed during keynotes, the experiment not only illuminated the power of Web 2.0 technology but also served as a fantastic medium for instant feedback — that is, until Microsoft researcher Danah Boyd started speaking too fast for the crowd’s liking during her keynote entitled, “Streams of Content, Limited Attention.”  What began as several tweets requesting a slower place quickly escalated into full-blown ridicule of her presentation skills complete with incessant laughter as members of the twitterati excitedly joined the spectacle. Funny maybe, for the twitterati, but certainly rude and humiliating to Danah, who could not see the tweets behind her and later blogged that her presentation “sucked.”

Of course, some other things happened at Web 2.0 as well. Anil Dash delighted that the government is finally warming to embrace new media and Gina Trapini kind of explained how Google Wave works, but make no mistake, Twitter and its band of twitterati brought out the best and worst of Web 2.0 Expo. Which, actually, serves as a microcosm for the world we live in today.

What are we going to do with all that cable that was laid in the 80s?

My mother and sister came up to see the new addition to our family last weekend.  If you read my 2007 M&A Research Report, I noted how my little sister and her friends spent an entire evening over Christmas break at the dinner table on Facebook having drinks and laughing with their laptops.  I felt like the old man watching a movie from Blockbuster in my mother’s living room.

Come 2009.  My mom is now on Facebook and I witnessed an event that showed me that cable’s days are numbered.  My sister and mom were sitting in two chairs with the laptop on the couch watching Grey’s Anatomy and the Practice (which they both missed).   I asked them if they wanted to sit on the couch and I would open up a table to set the laptop on.  My little sister replied, “Yes, that’s a great idea!”

So, here they were, sitting on the couch with a table set up with a laptop on it showing Grey’s Anatomy.  All the while, this laptop/table contraption was in between them and a super large flat screen television.  This is a clear sign of the times.  I took a look at my four-day old daughter sleeping in the corner and thought, she’s never going to know channel surfing the way I knew it.  (I can hear myself already, “Back in my day, I used to have to go to the store or walk to the mailbox for my movies!”)  It’s all going to be applications and recommendation engines telling her what media her friends are consuming and suggesting what media she might like.

By no means am I saying cable is dead, they are just going to have to lower their subscription rates.  Especially when broadcast licenses for sporting events are busted up to include new media, then the days of high subscription rates are over.  There will be a seismic transformation in the way content is consumed over the Internet.  During the next decade, cable will try to draw borders and carve up the Internet to sell sub-contracts for broadcasting live sporting events over the Internet, but it will not work.  Similar to magazines and the Internet, they’ll just cannibalize their core product trying to focus on the net.

Clearly, content will always be king.  (I mean people were writing on caves thousands of years ago.)  So, what are we going to do with all that cable we laid in the 80s?

Saved by the Google

Saved by the Bell

I’ve been spending my free time away taking tests to get a broker/dealer license and preparing for a newborn, which is a double excuse for such a short post and duration since my last post.  Although I have not been posting, I have been reading the trades and this post is appropriately titled “Saved by the Google.”  The meaning of the title is the fact that Google is on an acquisition tear (relative to M&A activity last year) and will be the catalyst to energize other buyers.  In December 2008, Google stock was at $250 and now it is at $500.  They are again feeling rich, and like any smart consumer, it’s time to go shopping while the prices are still low!  Bravo for Google’s aggressive and smart land grab.

On the other hand, I read in ReadWriteWeb that Google is in talks to buy Brightcove for $500 million.  In a sector with rapidly changing technology (video players), Brightcove built up a long list of partnerships with publishers to use its video player.  The operative word is partnerships.  Not delivery, not technology, not compression, not hi-def, back-flip pixels, and not behavioral advertising that knows what you did last summer…but Partnerships.  (Alan Iverson would have called this “Practice.”)  Wow, if that is not a serious case of “Saved By the Google,” I do not know what is.

I will now refer to Brightcove the Zack Morris of digital media!  I just hope Google has a plan for these partnerships and isn’t the Screech exit strategy for some lucky VCs.  But hey, they’re big boys with long dollars and, as I said in previous posts, they have the money to make mistakes.  And who am I to find fault with paying $500 million for partnerships?  I live in NYC, where people are too lazy (or busy) to walk their own dogs!

What Do You Know?

Reader’s Digest is going bankrupt.  This article is not necessarily about Reader’s Digest, but more about a project I was given early in my media investment banking career.  In 1999, I was tortured with  developing an Internet acquisition strategy for Reader’s Digest in the 3 to 4x EBITDA range.  (Yes, this was a time when Prince’s 1999 was in heavy rotation and most of these entrepreneurs had never even heard the word EBITDA…much less 4x it!)  I swore at that point never to return to the land of traditional media ibanking.  (I actually did work for another traditional media investment bank, but then made it my mandate not to work on projects unless a traditional media company was the buyer of a digital media asset.) Yes, I was truly scarred by this project.

Maybe six or seven years later, I believe Reader’s Digest finally found their target.  I think they acquired some recipe Internet company a few years back.  Ahhh, acquisition bliss.  And then the record scratches….errrr.  People getting their recipes in the print magazine do not care for online recipes.  Just bad idea jeans all around.  (Shake it off Doyle.)

This blog post is not about disparaging the people at Reader’s Digest or doing an end zone dance…it is about changing of the guard.  No matter how good a brand is, if it does not resonate with a new audience and establish itself as a player to be reckoned with on the medium du jour, then it becomes obsolete.  Plain and simple.  My mom, who is soon to be a grandmother, just joined Facebook.  To see the pictures.  Now she is a user.  She did not join Reader’s Digest.

The title “What Do You Know?” is the greeting that my old boss used to say to staff when he saw them in the halls.  It makes me cringe to this day, because I’d have to have another acquisition idea for Reader’s Digest.  (Everyone knew he wasn’t talking about the weather!)

Smart and Aggressive

Similar to the rumble of a wave under a surfboard, the third quarter of 2009 appears to be start to a period of aggressive smart acquisition strategies.  Amazon’s acquisition of Zappos.com, Facebook’s acquisition of Friendfeed.com, Microsoft selling Razorfish to Publicis and MSN’s deal with Yahoo are all very smart recapitalizations that happened this summer.  This could be the course of events that triggers other mid-cap digital media wallflowers to get off the beach and jump in the M&A waters!

(Yes, I did just return from a ten day California workaction. )

Best,

John

2009 Mid-Year Digital Media M&A Report

Peachtree Media Advisors, Inc. has released a mid-year digital media M&A transactions report.  Although the first half of the 2009 saw a significant drop-off in capital raised and transactions versus the same period last year, there are a few bright spots in the digital media sector.   We must keep in mind that interactive media deal-making did not fall off the proverbial cliff last year until Google missed their numbers in July 2008 and the infamous Sequoia presentation.  At that point, digital media VCs and companies felt susceptible to the effects of the economic downturn. On a relative basis, we expect the extreme opposite case for deal making in the 3rd and 4th Quarters of 2009 versus 2008 because of the heavy drop-off in the latter part of 2008.

For a copy of the report and insights, please e-mail JohnD@PeachtreeMediaAdvisors.com or click here http://tinyurl.com/ojx4ey.

Digital Media Valuations Increased Q2:2009

In the period from April 2009 to June 2009, ad-supported consumer digital media companies managed to squeak out a increase in valuation.  As a perennial optimist, I will say that it is time to start breaking out the champagne.  This is the time when the storm has passed, the damage is being assessed and the rebuilding begins.  I would also state that recent lay-offs at MySpace and maybe one or two other digital media companies are the final aftershocks that, in my opinion, have less to do with the economy than factors specifically related to those media companies.

As seen in the chart below, average valuation multiples of ad supported digital media companies increased from 2.5x Revenue in April 2009 to 2.7x Revenue in June 2009 and EBITDA multiples increase from 10.9x EBITDA in April 2009 to 12.3x in June 2009.  While this is not significant growth, it does signify a bottom and that valuations are heading in the right direction – up!  To use a jogging analogy, I would compare this to turning the corner and heading back home.  (For some reason it’s always easier to head back than it is going out.)  This also indicates that sanity has returned back to the market with people holding onto their shares while new buyers enter the market at the institutional level.  Institutional money managers with new capital coming in from pension funds have to put the money somewhere and they are finding equities cheap or oversold.

Is it time to break out the champagne?  The answer is an emphatic “Yes!”  But don’t buy too expensive a bottle because the slope of the valuation trajectory is fairly low!

June 2009 Ad Supported and Search Comps