About a year ago, I was sitting in the back of a car driving along a freeway in Los Angeles with my two bosses. One of them was Dale Strang.
Mr. Strang was sitting in the driver’s seat, both figuratively and literally.
Literally, Mr. Strang was dropping off my boss and I to our hotel. The next morning, we were set to talk to our new colleagues at IGN’s Los Angeles office. IGN had just bought our company.
Figuratively, Mr. Strang was Executive VP of IGN, essentially the COO of Media Properties, one of the three divisions within IGN. The other two being digital distribution and in-game advertising. I’ve written plenty about what a kick-ass company IGN is. The credit there goes to both CEO and co-founder Mark Jung as well as to the entire staff at IGN who survived some lean years to eventually ramp up, culminating with the sale to News Corp. for $650 million.
On the way to our hotel, sitting in the rear seat, I sat back and listened as Mr. Strang told us of the strange road that had led him to IGN.
Mr. Strang used to work at Ziff Davis as CEO and was lured away by Mr. Jung to run the media properties at IGN.
What was interesting was that a few years before that move, Ziff Davis was mulling buying IGN. Apparently Ziff Davis balked at the price difference that IGN was asking versus what Ziff Davis was willing to pay.
Whatever the price, that could not have been too much given that IGN - then known as Snowball - was trading at less than $1 per share. Had Ziff Davis acquired IGN, technically, Dale Strang would have been Mark Jung’s boss. But, seeing how things have a funny way of working out, IGN lured Dale Strang (must have been an airtight non-compete, by the way…), then Mr. Strang would be reporting to Mr. Jung.
IGN, of course, had gone private for $26.4 million in August of 2003 by Great Hill Partners. Less than three years, GHP got a massive return on their investment. If you are counting, that’s a 2,362% return folks.
Call me a putz, but that 2,362% return could have been Ziff Davis’ return.
More importantly, Ziff Davis would have had everything that was under IGN’s hood on its balance sheet: the media properties, the digital downloads, the in-game advertising. All red-hot areas of growth.
Today, as Ziff Davis explores strategic options here, it’s almost ironic IGN’s name can be thrown into the mix as potential suitors. IGN, of course, is now a part of News Corp. In fact, IGN under News Corp., or rather, News Corp. is a good fit for Ziff Davis as well. But probably not the best.
One company that might be interested as well is CNET. CNET is venturing in book / print with a McGraw Hill deal, and while magazines face a worrisome future, the fact of the matter is that magazines will not go away altogether. And if there was a time to buy low, it would be now, when multiples for all things print are deflated.
Mainly, Ziff’s writers, editors and sales people can simply shift their energy and focus to online instead of print. Ziff’s even launched 1up.com, to compete with IGN, though they still for some reason launch magazines (Sync, for example) even though the trends suggest they shouldn’t.
All of this is nice and dandy, but the question remains, what is Ziff Davis worth?
Well, according to their numbers, they generated Q2 EBITDA of $5.7 million on sales of $45.2 million in 2006, and EBITDA of $3.1 million of sales of $45.3 million in 2005. Sales are flat, income is growing, that’s good. Since I’m not exactly getting paid to do this analysis, let’s simply multiply these numbers by 4 to get an annual rate.
About $15-20 million in EBITDA on sales of $150-200 million.
What kind of multiples should Ziff Davis get?
We could look at publicly traded companies, and then apply a liquidity discount.
Or, we could look at recent transactions in the M&A space.
But that begs the question: is ZD a print-only company or does its online disposition give it enough “street cred” to justify and merit using higher online multiples?
Well, let’s see if it matters.
In 2005, Meredith acquired a handful of Gruner and Jahr magazines for $350 million, or 11.6 times EBITDA for print companies. Read that here.
In 2005, the average was about 16 times EBITDA for online companies. I know that a quick survey of deals suggest that multiples for online media companies has increased a bit, but since Ziff Davis is mainly a print company with a growing online disposition, we’ll simply go with 16 times as a reasonable multiple. Again, this is to simplify the analysis, we’re not aiming for super precision here.
But, to be fair, let’s take the average of 11.6 and 16, so 13.8 times EBITDA.
How much is Ziff Davis worth?
17.5M EBITDA x 13.8 times multiple = $241.5 million.
Is that right? After all, in 1999, ZD was taken private for $780 million. Read that here.
Did $540 million in value evaporate?
Hmm… IGN’s value rose to $650 million from 1999 to 2006. Maybe the Web and investing is a net zero sum game after all (where one’s loss is another one’s gain - generally the stock market is not seen as a net zero sum gain, though the options market are). Maybe not, that’s probably a coincidence. Besides, that’s over $110 million difference, no small change.
Anyway, told you Dale Strang was sitting in the driver’s seat…
[Disclosures:
1 - This writer worked at News Corp. from Sept. 2005 to Dec. 2005, and at IGN from June 2005 to Dec. 2005.
2 - Of the companies mentioned, this writer owns shares of CNET and if CNET was interested in acquiring ZD, he suggests that CNET contact him to do a proper analysis and not overpay! Of course, if Ziff Davis wants to really get original about its “strategic options”, you know where to find me.]
Tags: Internet & Web, M&A|
Posted By: Ashkan Karbasfrooshan | Aug 1st
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