] HipMojo.com » The Great Merger Movement II - Memo to Self: It’s a Seller’s Market

The Great Merger Movement II - Memo to Self: It’s a Seller’s Market

According to Silicon Alley Insider:

NY-based social networking/photo sharing site Fotolog has been acquired by Hi-Media Group for a combination of cash and stock worth $90 million. France-based Hi-Media adds Fotolog to its growing portfolio, which includes an ad network and a micro-payments business.

Invariably, the comparisons to Photobucket will come up, so let’s get that out of the way: yes, Fotolog is “only” getting 1/3 of what Photobucket got, but given its financials and traffic chart, it’s a very good deal.

One VC, Christian Leybold (with probably the best blog address for any VC) jumps in to clarify, however, that:

This is not “just another” photo sharing site, but a communications platform where people communicate through daily uploading of one picture and comment on each others works.

I had not heard of Fotolog until last week, when Valleywag mentioned it might be on the block. Of course, who gives a flying you-know-what if I’d not heard it. The key thing is that many prospective buyers had heard of Fotolog, Silicon Alley reports:

Fotolog estimates 2007 revenue of about $2.3 million. Last month, the company signed a 3-year search and advertising deal with Google that we estimate is worth a total of $75 million. Fotolog says sales have jumped 245% since January and that the company will break even within six months, resulting in positive operating income next year.

Take out your calculators folks, at a forecasted 2007 revenue of$2.3M, a net-of-transaction fee sale of $90M implies a pretty rich 39 prices-to-earnings ratio. Now, it’s one thing for a cash-rich traditional media company seeing audiences and revenue growth rates migrate to the web pay such a premium, but for Hi-Media, a French-based new media entity pay $9/user is impressive.

This is a nice payoff for the financial backers, who have put in $12M thus far.

The thing that I don’t get, frankly, is why would Google pay $75M over 36 months, or $2M/month, to simply sell ads if it can pay $15M more and buy the whole darned thing.

I understand all about time value of money… but, you’d think that after paying $900M to MySpace over 45 months (which turned out to be more given MySpace’s torrid traffic and revenue growth) a year after News Corp. bought MySpace parent Intermix for $580M, the brass at Google would be getting its corporate - and not business - development team making these deals.

In fact, Hi-Media is an ad network, much like what Google is today.

Regardless, I think some buyers just understand that some assets will not be cheaper tomorrow, only more expensive, and that’s if they are even still for sale, that is… because we’re in the early stages of a massive consolidation. This is nothing new, at the turn of the 19th to 20th century, we saw something of a similar scale. From Wikipedia.org:

The Great Merger Movement was a predominantly U.S. business phenomenon that happened from 1895 to 1905. During this time, small firms with little market share consolidated with similar firms to form large, powerful institutions that dominated their markets. The vehicle used were so-called trusts. To truly understand how large this movement was—in 1900 the value of firms acquired in mergers was 20% of GDP. In 1990 the value was only 3% and from 1998–2000 is was around 10–11% of GDP. Organizations that commanded the greatest share of the market in 1905 saw that command disintegrate by 1929 as smaller competitors joined forces with each other.

Sure, the dollars today are larger, but guess what, we don’t have 1B people on earth, we have over 6.5B and one - and only one - medium has the ability to connect people: the Web. It’s not so much of a land-grab mentality as one that “only the paranoid survive.” Cash is king, but on a balance sheet, it’s an afterthought. This is a cash and largely stock deal… and if you are a European ad network like Hi-Media that trades on the stock exchange, well, your stock is as good as gold, or cash.

And, of course, don’t kind yourself, the fact that the VCs backing Fotolog will keep their payout in Hi-Media stock implies that Hi-Media is itself potentially positioning itself for a flip.  This is clever financial engineering, something I’ve seen in my days: IGN paid my company 11.35 times EBITDA, and my colleagues (who owned the company) agreed, then IGN turned around and sold for 40 times EBITDA, that little bit of financial engineering netted IGN shareholders (including Great Hill Partners) $28.65M more.  Of course, paying 39 times sales, it seems unlikely that Hi-Media is doing this for any other reason that getting an asset (10M members) that it feels it can monetize and potentially flip.

Tags: , , , , |
Posted By: Ashkan Karbasfrooshan | Aug 27th

Subscribe:


Leave a Reply

*
To prove that you're not a bot, enter this code
Anti-Spam Image

Subscribe:


« « previous post | next post » »
Admin

Shortcut:
HipMojo.com

Subscribe:

Search Site:

Categories:

Archives:

Blogroll: