If Forbes is right, one of my former competitors is about to be acquired by none other than Hearst in a deal that definitely made me look back and think ahead.
Let’s look at the story first:
On Tuesday morning, Hearst Corp. was expected to announce the acquisition of UGO Networks, a collection of Web sites targeting young men interested in video games, sports and pictures of hot girls. UGO claims 11 million unique visitors a month. Terms of the deal, which took two years to come to fruition, were not disclosed. Forbes estimates the acquisition to be in the neighborhood of $100 million.
On the surface this is pretty impressive and right off the bat I want to congratulate all of the parties, but some food for thought: my last company, who operates in the same space as UGO, had about 5M uniques, 35% market share in the men’s lifestyle (dating, basically) space, $4M in yearly revenues, $1.2M in EBITDA and sold for $13.5M to IGN in 2005. Average M/A multiples were 16.9x EBITDA, my fellow colleagues settled for about 11.25x EBITDA. If you’re keeping tabs: IGN itself sold for 40x EBITDA to News Corp. for $650M in October 2005 and was the market leader in terms of men 18-24 and 18-34.
UGO’s CEO has been trying to sell his company for more than two years. Just about every media giant out there has taken a look at the deal, and then taken a pass. The nine-year-old company has 82 employees and brings in some $30 million in revenue and an estimated $6 million in EBITDA.
Judging by those numbers, UGO sold for 3.3x revenue and 16.6x EBITDA. PaidContent says the deal might be as high as $150M, at that level, this deal would come in at 5x revenue and 25x EBITDA.
As I said on the surface, a $100M payoff looks good, but in fact, UGO has raised $82M in financing over its lifetime.
New York City-based UGO is one of the last Web 1.0 holdouts to have a successful outcome, (…) the few companies that survived raised such ridiculous amounts of money that just about any exit is sure to be an unprofitable one.
What’s ridiculous?
Chief Executive J. Moses and President Michael McCracken spent nine years and $82 million trying to build the ultimate online destination for young men. They burned through multiple business plans. They had to execute multiple rounds of layoffs and multiple fire sales. In order to get out of a lease on a space they could no longer afford, they had to give away millions of dollars worth of data center equipment. Their friends and family told them to quit. “It was total depression. Total freak out,” recalls Moses.
Tenacious, persistent, determined, and yes, ridiculous. But, when UGO started off, everyone in the space was raising ridiculous sums. Ok, well, we didn’t, but more on that later.
At my old gig, my colleagues and I built “the ultimate men’s destination” with, sit down folks, $500,000. I think we went through half of that, the rest was driven by actual sales.
Another one of our competitors, TheMan.com, raised $17M from Bob Davis’ Highland Capital. They shut down within a year. Point is, yes, this is ridiculous, but you have to give them credit for sticking to the business, even if no one trusted them:
All but one of their venture backers gave up on them. And that firm, Los Angeles-based GRP Partners, gave them a cram down. GRP inserted an onerous term called a 5-X liquidation preference, something financiers only dare suggest to the most desperate companies. It means if UGO sold itself, GRP would be guaranteed to reap five times its investment before anyone else got paid.
5-X? Is that the new BMW? Remind me to hold off on the 5-X… and may I ask, who was crazy-er here? Moses? UGO? or the VC? You might think Hearst but given the rounding error that $100M is for an institution like Hearst, this does give them a shot in the arm both online and in the men’s segment… a market that is certainly competitive:
UGO is up against some pretty tough competitors, including ESPN, Maxim, MTV and IGN. Moses and McCracken knew they would be unable to survive against such heavily financed media outlets. “The media business is all about size and leverage,” said Moses in an interview a few months ago.
Hmm… I agree, but again, with all due respect: that is a cop out. Large media companies are great in many ways. Once they move, they really move. But by their nature they’re also somewhat slow: slow to act, slow to react, slow to adapt.
That’s how small media beats old media, that’s how new tech beats old tech, no?
I was part of a team that took on MTV, Maxim, Esquire, etc. and beat them fair and square. The time it took these companies to realize what to do online, we built a business.
I fail to believe that $82M won’t help you do it: we had 1/164th the amount UGO did and were able to. Of course, that’s why we only did $4M in revenues, but in the end, I think the first (and only) investors in our company probably fared better than the first investors in UGO, and for what it’s worth, as a financial manager, that is a priority.
“We can’t make it on our own. When the Web was about words and statistics, we were able to compete. But now it’s about video. And for video, you need more money.”
Hmm… Pardon the shameless plug, but I’m applying the same formula of low-cost, high quality content to video as I did to text with my new company WatchMojo.com. If I had $82M in financing, trust me, the company would exit at $1B.
Sure, the business plan is modified for video and the content is tweaked to serve both demograpics, but the broader game plan is the same. I’m not sure video is all that alien: Yahoo! hired ABC executive Lloyd Braun to spearhead original content. What did Yahoo! have to show for it? The Nine. Pretty lame if you ask me given all of Yahoo!’s resources (disclaimer: own YHOO shares).
At WatchMojo.com, we’ve built up a library of thousands of original, low-cost, high quality, informative and entertaining clips.
Yes, trust me, I can tell you that video is expensive. I see the bills every day. That’s why you need a plan and a strategy.
For a company like Hearst, which has multiple media properties including Lifetime Television, The Houston Chronicle, Esquire and Cosmopolitan, UGO brings nine years’ worth of Internet experience.
This is certainly true.
Kenneth Bronfin, president of Hearst Interactive Media, said he plans to retain both Moses and McCracken, and allow them to run the company as a separate entity.
I just wonder how much Moses and McCracken have left in the tank. Don’t get me wrong, maybe they’ll be rejuvenated thanks to Hearst’s resources, but after spending nine years building up UGO and getting 5-X’d, maybe they want to rest a bit…
I think this deal is good for Hearst because it gives them a foothold in the men’s space, but if Hearst is serious about the Web, this should really just be step 1. By the sounds of it, that’s the plan:
Bronfin will also consider more acquisitions to help build out the UGO property.
I guess the ultimate lesson, frankly, is Moses’s parting words: “In the valley of death, we always found a way out.”
Indeed. As I’ve written in the past, it’s all about the 3 Ps.
Technically, on paper, Hearst’s assets + UGO’s 11M uniques should make this deal a success, but as they say, the devil’s in the details and it all boils down to the next steps and implementation…
Read more on the Hearst/UGO deal.
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