Valuations are Inching Higher

Wednesday, May 5th, 2010 at 12:03 am

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.

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Greentech Valuations are Edging Up

Friday, October 16th, 2009 at 2:02 pm

The greentech sector (as well as most other sectors) appeared to have bottomed out a few months ago. As seen in the most recent Peachtree comps update (www.peachtreegreenadvisors.com), valuations for publicly traded comparable greentech companies are creeping up. The overall EBITDA multiple for renewable energy companies increased slightly from 15.3x EBITDA in July-09 to of valuation to 15.6x EBTDA in Oct-09. The slight increase represents a re-calibrated definition of confidence on behalf of investors. While current growth predictions are not the “we are changing the world” pie in the sky projections of yesteryear, the political will to push forward on these renewable fuels and clean technologies is clearly apparent. That said, the two largest renewable energy sectors (solar and wind) are well-positioned to capitalize on a stable economic environment with continued public and private support. (Although there have been several renewable energy projects scrapped or sold on the part of the large oil companies, the Lewis & Clark will on the part of investors to push on can be seen in the relatively high valuations that the market is putting on these renewable energy and cleantech companies.)

The reason that I say greentech valuations are “relatively high” is due to the fact that this sector is still in its early stages with the valuation, reporting and capital raise efforts akin to the wild wild west. (Yes, be prepared for many more 19th century Manifest Destiny type analogies.) The greentech industry is filled with many so many companies with lofty valuations, but no real business revenue. Similar to the Internet sector 15 years ago, most of the greentech “technologies” have been around for years. Media was not invented with the Internet. Many companies are also changing their name to “green” similar to the way companies changed their name to .com in the late 90s. (Did someone say Peachtree Green Advisors?)

Sorting through the business models is posing a small challenge for many of the providers of capital as well. More importantly, the inability for these companies to produce revenue at an early stage and the capital intensive nature of developing these technologies are prohibitive to traditional Angel investors getting involved (many of whom are licking their wounds right now). Also, many companies have taken to the practice of counting grant money and partnership investment as revenue, making it more difficult to build uniform apples-to-apples comparisons. Hence, the term “wild wild west” comes to mind.

As seen in Wonderhill New Energy’s latest global index of greentech stock prices appears below, greentech valuations are on the rise globally. Although valuations are far from where they were at the height of optimism in 2008, a stable economic environment will help to propel growth for greentech companies by allowing these companies to compete in an environment with a more receptive consumer. The only sand trap that I can see is whether the political will exists to continue onward for the next decade. National and local governments across the globe generate substantial amounts of tax revenue from dirty cheap fossil fuels. (Cigarettes are still sold and taxed around the world.)

Wilder Index Sep 2009

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Digital Media Valuations Increased Q2:2009

Monday, June 22nd, 2009 at 7:19 pm

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

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More Twitter

Monday, May 11th, 2009 at 12:58 pm

Digital media acquisitions have been far and few in between in 2009 because the current recession has slashed prices of publicly traded firms (creating a gap in perceived market value) while causing a flight to quality (favoring reliable cashflow over the risk associated with growth potential). Yet, in an exceedingly silent digital media landscape, firms have been clamoring with intrigue for Twitter, with Apple as the latest name to enter the fray at a rumored $700 million. Why?

The problem with Twitter is that while other digital media firms are floudering in the dreary economy, it apparently has yet to receive the memo. According the Mashable, Twitter has posted month-over-month unique-visitor growth rates of 76.8% and 38.6% in March and April, while welcoming the likes of Oprah, Ashton Kutcher, and CNN to its ever-expanding network of users. Increasingly, Twitter has come to be mentioned in the same breath as social networking conglomerates MySpace and Facebook.

The very fear of missing out on the next MySpace or Facebook, interestingly, has induced the same buyers valuing other digital media companies with a disciplined approach to cast a blind eye toward Twitter’s major flaw: a non-existent revenue model. Without a proven model to monetize its user base, Twitter is both extremely risky and difficult (if not impossible) to value. Conveniently for Twitter, many are simply using MySpace and Facebook as comparable valuations, when the latter two have already acquired consistent (if still underwhelming) revenue streams. Is it asking too much for potential acquirers to require the same of Twitter before they offer the hefty valuations currently being thrown around?

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Twitter = Rollerblades

Thursday, May 7th, 2009 at 5:33 pm

There’s a great deal of talk about Twitter and Apple. Every digital media blog out there is writing about the acquisition rumor or who should buy Twitter for $700 million. I just wanted to write a quick blog post, not as a 35 year old over the hill curmudgeon, but as a media-centric and technology oriented realist. Twitter is to roller blades as Facebook is to the NFL (in Internet dog years). One is a fad and the other is an immovable force that is ingrained in the American culture.

Instead of buying Twitter for $700 million, any strategic buyer could invest that $700 million in 700 early stage start-ups. This would not only help the economy, but drive innovation and quite possibly take Internet, retail and mobile applications to an entirely different level. (I could introduce Apple or Google to all 700 targets as well!)

But no, there is fool’s gold with Twitter. From the VC that just needed “one last hit” to cover the smell emanating from their portfolios (investing without seeing a business plan) to the CEO that believes glorified text messaging “to the Internet” is genius, much better than texting to another phone. ”All you have to do is slap an ad on it.” Famous last words.

Here’s how it goes: “Arrgg, I spilled ketchup on my yellow canary yacht pants!” The text is already sent, so who gets the ad for Clorox? The sender or the recipient? How do you convince Clorox this is how they want to spend their money? Tough uphill battle on that sell. On the other hand, I’m not going to pay $5 a month to hear that someone I kind of like is at a baseball game with people that I don’t even know. Maybe I just don’t get it.

On second thought, I think this transaction needs to happen. In order to get past the sophomore phase of the Internet’s growth spurt and graduate to the junior year. There needs to be a little more EBITDA discipline with Internet start ups. As everyone in digital media is learning now, it’s not that easy to “slap an ad on it” or hook it up to an ad network. It is time to start building real innovative businesses that make people’s lives better or businesses more efficient while making money in the process.

Signed,

The old curmudgeon in the stands at the Muppet’s show.

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Digital Media Valuations Update Q1 2009

Tuesday, April 28th, 2009 at 4:47 pm

This post is just an update on valuations in Q1 2009. All of my positions from the 2008 M&A Round Up, About Peachtree (www.peachtreemediaadvisors.com) and my podcast interview with DishyMix remain the same. I’m fairly positive that the economy will turn around in Q4 2009 and M&A will begin to show signs of life in Q4. My position with regard to M&A remains the same as well, M&A will pick up with strategic partners first. Most CEOs of large diversified media companies will seek smaller and safer tuck-in acquisitions with companies that they have an existing relationship with. Looking at the number of acquisitions that are not getting done is a testament to the tepidness in the M&A market. Many bankers are sending out press releases that XYZ is for sale, which is somewhat embarrassing for all parties.

Here is a link to charts below in powerpoint format: http://peachtreemediaadvisors.com/Pitch/Q12009DigitalMediaValuationComps.ppt

Commercial Alert–> (Let the onslaught of recent “they’re for sale” press releases be a clear signal that paying more for investment banking services has no correlation to better service or getting a deal closed, it only means paying more. The solution: Invite Peachtree Media Advisors, Inc. to your next pitch…It doesn’t cost a dime and you might learn something!)

For the most part, public company valuations have increased slightly, which is an extremely positive sign for the digital media sector (all things considered). Online advertising valuations are slightly down and, as discussed in the 2008 M&A Round Up, the e-commerce group is showing significant valuation growth due to anticipated growth in online purchases. Price conscious consumers will likely continue to capitalize on their broadband Internet access and conduct price comparison searches online prior to making a purchase.

Online Advertising Comps Q1 2009

Interactive Marketing Services Q1 2009

B2B Comps Q1 2009

E-commerce Comps Q1 2009

Diversified Media Q1 2009

Overall, this could be a bottom and it is not that bad. When I started in this business in 1995, six times EBITDA was a good price for a media company. Somehow the Internet came along and sent valuations to the moon. I think that we are in the Junior Year of the Internet, with the first bubble burst being the Freshman year 15 pounds and the most recent burst in valuation being sophomoric arrogance. I use the word arrogance in the sense that many business models were based on cool applications that would then be supported by some ad network. It is now clear what happens when ad revenue from those ad networks run dry.

In the coming Junior year phase of the Internet, entrpreneurs will likely focus on their customers and learning significantly more about their constituents. The customers are clearly the advertisers and, hopefully, the next wave of digital media companies will have natural or endemic advertisers in mind prior to launching their businesses. Media 101 Advanced Placement.

Out-of-Home Media Q1 2009

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What is the value of my company?

Tuesday, March 17th, 2009 at 2:10 pm

The most common question that I get from entrepreneurs is “what is the value of my company?” The answer to that question is simply what someone is willing to pay for your company at a single point in time. That said, the primary variables to valuing a digital media company are the growth rate, competitive landscape (market metrics/trends) and the strategic buyer group.

Just like any asset, a digital media company’s value is derived from the anticipated cash that can be derived from owning that particular asset as well as the condition and prices of similar assets in the market. Today, the value of most digital media companies is not derived from following the traditional corporate finance practice of discounting the projected cash flows at a representative discount rate. Future cash flows are difficult to predict and one buyer is going to have a completely different opinion on how to make monetize an asset from another buyer.

Comparable private company transaction values and the valuation multiples of publicly traded companies (“comps”) are a good way to ascertain a valuation range. Unfortunately, these are only tools that can provide a business owner with a range, which are typically based on multiples of Revenue and EBITDA. These metrics fall short in pinpointing the actual value at which a transaction should take place.

Three of the most common statements that I get from clients that are not factors related to valuation are the following: 1) Company XYZ received $30 million and my site is better than theirs; 2) All the buyer has to do is add advertising and invest a little bit of money in marketing, then we will be an $X million company based on those revenue multiples (that’s like me saying all I have to do is lose some weight and take acting classes and then I’ll be the next Denzel Washington)…forecasting is taken into account in M&A, but buyers typically do not want to pay for what they are bringing to the table; and 3) the most common statement is “I believe my company’s value is $X million,” which is an arbitrary number that is based on external factors that have nothing to do with the business, such as this is what I want for the number of years that were put into the company, this is how much money I want at this point in my life or I can live comfortably off of this amount for however many years. Who knows the exact psychological rationale, but many of the reasons for seller value have little to do with the asset (at first).

So, instead of asking “what is the value of my company” an entrepreneur should be asking themselves “how and when do I achieve maximum value for my company?” The best way to maximize value is to hire an investment banker that focuses on your sector and selling to the company that needs your company the most at the time when they are motivated buyers. Although an entrepreneur can run the process themselves, and many are successful at doing so, oftentimes hiring an advisor is money well spent. Not only is it a piece of mind, but it saves the business owner a great deal of time that can and should be spent on running their business.

Similar to getting a second opinion from a doctor, the entrepreneur should get the opinions of multiple bankers. This will help the entrepreneur get a better feel for where her company is valued or its potential value. In choosing a banker, the business owner should choose the banker that they feel most comfortable with, understands her business, and knows who the potential strategic buyers are and why they would want to own her company.

As a banker, I clearly believe that the sell process generates the highest possible valuation and best deal structure for clients in the right environment. Entrepreneurs that believe they will be looking to sell in the next year or two should begin speaking with advisors now. Deal-making in the coming months is going to be done with surgical precision, meaning there will be few wide nets cast by buyers, but simple lines cast for very specific targets that complement current operations. Having an advisor that understands your business completely will serve you well in the marketing process.

Posted in Digital Media, Investment Banking, M&A | Leave a Comment »

Valuations are Inching Higher

Greentech Valuations are Edging Up

Digital Media Valuations Increased Q2:2009

More Twitter

Twitter = Rollerblades

Digital Media Valuations Update Q1 2009

What is the value of my company?

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