2007 is set to return the tech IPO. No, not the ippo as in hippo, the eye-pee-oh. Kids, look up the term in encyclopedia to see what an IPO is, after all, it’s been a good few years before we’ve had a major tech IPO (Google) and at least seven years before the IPO market was anything but moribund.
I was just checking out Vallywag and it raised an interesting point in this piece, called Silicon Valley’s illusory independence. In a nutshell, the author (I’d love to tell you who wrote it but I’d be damned if I could ever find a writer tag on Valleywag’s otherwise unique and insightful reporting) states that the Web M&A landscape/market has dried up since Google’s $1.65B buyout of YouTube, and due to the problems that derived from that deal (along with the dMarc fallout), Google and others have cooled off from buying companies. In fact, it’s true that the small deal notwithstanding (Yahoo!/Mybloglog, for example), M&As seem to have cooled off quite a bit.
When I was in Manhattan a couple of weeks ago, a very well respected and otherwise pricey investment bank invited me to meet one of their managing directors. Initially, I was shocked. What, on earth, would I, mere mortal amongst gods, be able to offer such a venerable bank? It was rewarding in one way: at my older job, working as VP of ad sales at a much larger Web firm, I had tried numerous times, in vain, to get a meeting with said bank. But here and now, lo and behold, the gates had opened and I was let in. Ego brushing aside, I had to understand what I had to offer to them? Sure our company operates in two hot spaces of digital media and technology, namely search and online video, but still, why me? Why now?
Upon reading the Valleywag article, I think I understand.
Internet assets have risen in price. In fact, many of the most sought-after-crown jewels have effectively priced themselves out of the buyout market.
- Digg asked for $150M from News Corp. That’s ridiculous. It has 1M registered accounts, and I presume most accounts are duplicates. Even if it gets the supposed 20M uniques a month it claimed/claims, that is a preposterous price to pay for a shell. Don’t get me wrong, Digg is cool and Kevin Rose deserves a lot of credit, but the barrier to entry is none-existent. We have a social bookmarking tool ready to go, we could open it up to our community of hundreds of thousands of unique users. We don’t. Why? Too much clutter. Too much noise.
- Facebook for $2B? “I think not,” said Viacom’s Sumner Redstone. Ironic, you would think, since Mr. Redstone’s nemesis Rupert Murdoch (and my one-time boss for six months of brief magical bliss intertwined with shock and awe) “stole” Myspace from Redstone at the final buzzer. Wouldn’t Redstone wish to avenge MySpace by buying Facebook? Apparently not, at least not for $2B. Even Yahoo!’s $1B offer wasn’t enough for Mark Zuckerberg. In fact, word on the street is that the price could have hit $1.6B.
Whatever the case, MSFT’s Facebook deal is paying the bills and with VCs financing the growth, Zuckerberg does not want to sell… or does no one really want to buy, at Mark’s price. Of course, even if MSFT will not renew the deal (according to some), Facebook is well on its way to remain alone, were it not for the VCs who are expecting an M&A-rich exit, and not a peasant’s like operational income returns.
Interesting, methinks, all of this.
Could it be then, that in some cosmic twist of irony, M&As will enter a period of “lullability” that had sent the tech IPO market into doldrums? Think about it: IPOs coming back into vogue, M&As heading for the bunker.
When you think about it, most of the best M&As deals that took place in the Web space were done in the nuclear holocaust season of 2003. We chronicled the Top 10 Web deals here. The price to sales and price to earnings were reasonable. Today’s companies are reminders of the 1994-2000 era companies with no real earnings, few have revenues, but nothing that would justify the kind of price that the would-be buyers want.
If you think about it, this makes sense. To a company like Google, who has sky-high P/S and P/E rations, cash flow is not king. But for Viacom, Walt Disney, News Corp., NBC Universal, CBS and company, the only thing that moves the stock are financial metrics, such as revenues and income, as such, buying sexy companies like Digg and Facebook at sky high valuations means that the stock takes a hit (as does the stock of the buying company in M&As usually) and there are no financial returns to serve as tonics down the road. Barry Diller recently came out and said prices were expensive, too.
Maybe the media companies are indeed better off remaining on the sidelines until Web assets cool off. Of course, when you consider that Web advertising hit nearly $5B in Q4 2006 and TV revenues still generate $80B per year, you sort of know that the former has a lot of room to grow while the latter has a lot of cannibalization to endure.
It certainly is a great time to be in the web business, and so long as you don’t have impatient investors looking to cash out at sky high returns, you can create successful businesses that in the long term will generate considerable financial returns.
There’s an interesting storyline here, I think both Valleywag and we are reading way too much into this, but I think that if young web firms are to sell, they just might have to sell early on, because given the growth rates of online businesses, multiples will quickly soar and prices will get too rich for media firms looking to buy… meaning that the M&A market might cool and more and more companies might one day look at the public markets to cash out their holdings.
Of course, there’s always private equity.
Of the companies mentioned above: I own shares in YHOO!
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