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.

The New Dishy Mix Interview

Below is a link to the 2nd Dishy Mix podcast interview with Susan Bratton and me regarding Digital Media M&A.

http://blogs.personallifemedia.com/dishymix/

Look for DM 136 podcast: John Doyle.

It’s always fun to speak with Susan and we decided to make this an annual conversation.  Enjoy!

Best,

John

Let the Door Hit You 2009

Where the sun don’t shine!

What a stinker of a year.  Unless you received TARP money, then you had a windfall!  For those entrepreneurs fighting the good fight, here’s to us and I mean it.  Seriously.  You should pat yourselves on the back because there were so many digital media companies that went under last year.  Tough stuff, so raise a glass to the survivors.

The Internet Enters its Junior Year in 2010

The past six years were sophomoric and all about traffic.  Now it’s about revenue.  When the Internet graduates, it will be about EBITDA, assets and debt.  Yes, debt.  With inconsistent or non-existent cash flows in the digital media sector, companies are not benefiting from some of the benefits of raising debt.  As I learned in 2009, with lawyers sending bankruptcy notices and liquidating digital media assets, there are not many assets.  Media companies do not have very many assets, but digital media companies have virtually no assets (e.g., printing press, movie theater popcorn machine and projector, broadcasting equipment, etc.)

Traditional Media and Digital Media War in 2010

Clearly, the TimeWarner AOL merger will go down as the worst merger in U.S. history.  Now AOL is divesting itself and going public.  Maybe this just goes to show that you are either digital or you are traditional and there is no combining the two.

The reason media companies consolidated in the 70s and 80s was to try to neutralize the cyclical nature of advertising by diversifying their revenue streams with subscription-based models as well as hit-based models (gaming, movies and music).  This is clearly simplification of media consolidation, but my point is that digital media companies have not integrated so well with traditional media companies nor have they been able to consolidate around diverse revenue streams.  Over the last five years, large traditional media companies purchased digital media companies like tourists looking at trinkets in a Jamaican tourist shop.  They had no real desire to maximize their value, just buying the latest media darlings.  When it came to actually selling media or advertising, especially in a recession, the turf wars became apparent.  Digital media advertising became a “we’ll throw it in” the advertising buy for free as a deal sweetener.

One major thing to take away from 2009 is that digital media companies must figure out new revenue models and monetization schemes.  It was clear that the large traditional media companies treated their digital media assets like the free coleslaw at a sandwich shop.  The lack of effort by sales division to sell or cross market digital media has caused a great deal of friction and belittled digital media assets.  Now the traditional media companies are trying to divest from these “non-core” assets primarily because they refused to move into a digital media mindset.

Digital media or traditional may not be able to coexist.  The war over the television remote is just beginning.  In the 80s, the cool kid on the block had cable.  Twenty years from now, the kids will not want to assemble at someone’s house due to the fact that they have cable TV.  Video on demand content from the Internet is in the near future.  Netflix’s Roku player and AppleTV will make it interesting as Comcast tries to enhance its interactive TV features in addition to acquiring NBC.

The next year will be the year of unraveling, but a solid stepping stone for stand-alone digital media entities.  Especially, the ones who survived.

Gotta Laugh at this Economy?

I need to start this post out by saying my Mom is one of the best persons in the world.  Why?  Her house in Florida was robbed yesterday while she was at work and these guys took a lot. Her response?  “It’s the economy, times are hard and folks are desperate.”  She had a smile on her face and had a few laughs.  Wow, what a reasonable smart woman.  (I actually felt robbed, because I bought some of the stuff that got stolen!)  Anyway, she’s doing fine and getting a new big time security system put in today…the “day after” she needed it.  (<–That’s a blog post in itself, the sectors that do well in a down economy – security, health care, pharma, lead gen/performance, etc.)

So, that brings me to what I believe is the point of this blog.  People are starting to get aggressive and need to sit back and laugh a bit or take the proverbial chill pill.  This terrible economy has not only emboldened people at the lower rings of society, but also the educated circles.  I get calls on the daily from entrepreneurs asking me for free M&A advice as if I’m an information booth in Times Square.  (I get it.  People are more comfortable haggling with mom and pops rather than Macy’s…http://www.youtube.com/watch?v=R2a8TRSgzZY.)

But when it comes to the job market, I am getting inquiries from some fairly aggressive job seekers.  It’s as if people feel like I’ve wronged them in the worst way if I do not interview them.  I guess it is like being denied at a club that was cool ten years ago or they feel that it was beneath them to even apply.  I’m not sure, but I did not cause this recession and take that tude back down to Wall Street.   (It is only two people that I am blogging about in particular…so, keep the resumes coming!)

What I really wanted to do was give everyone something to laugh about.  The link above and the one below are tell-tale signs of the state that we are in.  Everyone needs a little bit of my mom’s positive attitude (including myself) and laugh at the economy!

http://www.youtube.com/watch?v=I6IQ_FOCE6I

Best,

John

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

Growth in Interactive Marketing Services in 2009?

I just read an interesting article written by Mark Walsh at Media Post and based on a press release from Forrester Research.  I’m not exactly sure what to make of an article that is dated today and states interactive marketing to grow by 11% in 2009…in this economic environment.  http://www.mediapost.com/publications/?fa=Articles.showArticle&art_aid=105767

But I am a perrenial optimist and, as discussed in recent posts, the price of oil is beginning to increase, which is a leading indicator for commerce…when it gets to $70, then we’re growing (http://www.oil-price.net).  Also, look for housing prices to stabilize and bank lending to increase.  These two factors appear to be happening already in addition to credit being extended to corporations.  Look for prices to stop dropping and hope for an increase in interest rates.  (I just checked, this is already happening.)  An increase in interest rates means that there is pricing pressure or competition for capital.  Treasury yields are increasing, which means people are opting for slightly better yield with a riskier asset class for debt.   Unemployment is increasing at a slower rate (the lagging indicator).  Now we’ve just got to look at the price of commodities…an increase in these would mean that more stuff is being made as well as shipped.   Then new people will hired to produce more goods and, last but clearly not least, corporations will begin advertising more to make sure those goods are sold. 

I think this is the calm after the storm, when people begin peaking their heads out of their doorways.  There may be some thunder, but it appears the storm has passed.  Now is the time to assess the damage and rebuild.  According to Forrester, most of this growth in interactive marketing will not come from new advertising, but from displaced ad dollars from traditional media channels.  So, I would not take their assessment as the pie is getting bigger by any means and would dress accordingly before venturing out the door.