When I was in business school, one of my professors used that expression, “gobble or be gobbled,” and it stuck with me. Indeed, nowadays, it’s a very apt description of the state of affairs.
Last week, aQuantive made headlines for all of the right reasons.
In 2006, aQuantive went on a rapid acquisition binge, scooping up a number of companies around the globe and in various sub-segments within the online ad industry: Franchise Gator, a performance media company; Amnesia, an Australian interactive ad firm; Neue Digitale, a German interactive ad firm; and eCrusade, a Hong-Kong interactive ad firm. Aquantive also buys Accipiter Solutions, an ad-serving technology company.
Then, in 2007, it got acquired by Microsoft for $6B in an all-cash deal. I was a shareholder of the company since the single digit days (2003, having sold and bought a few times), and indeed, it was a nice Friday last week.
But aQuantive’s own path reminded me of my brief employer’s path, IGN Entertainment. More on that in a second.
Media is in period of rapid and massive consolidation. There’s nothing new there. Companies can be consolidators or become a target of consolidation.
In today’s era, they can be both. Ideally, they leverage their brand equity and balance sheet, do a couple of deals as consolidators, bolster their income statements and then sell themselves.
If it’s a public company, it can be taken out by someone else, as was the case with aQuantive.
If it’s a private company, they can file for an IPO and still sell to someone else. As was the case with IGN Entertainment.
IGN was a publisher of content focused on one vertical: video games. Founded by Chris Anderson and Mark Jung as Snowball, the company’s boom-era IPO ended off badly, with a going-private deal with Great Hill Partners for $29.8M in 05/2003.
IGN’s revenues were:
- 2002: $11M
- 2003: $17M
- 2004: $47M
- 2005: $70M (est.)
- 2006: $75M (est.)
IGN changed the 3-man race in video game content publishing into a 2-company race when it bought one of its competitors, GameSpy (the third competitor being CNET’s Gamespot):
- 12/2003: IGN buys Gamespy for $53.3M (direct download technology, PC gaming property).
It then bought two more small sites to galvanize endemic sales:
- 02/2004: 3D Gamers, a rival video game news site, for $2M (Gaming property).
- 04/2004: TeamXbox, an XBox-only gaming site, for $610K (XBOX property).
Based on the strength of entertainment sales, IGN made its first non-endemic acquisition:
- 06/2004: Rotten Tomatoes for $7.8M (film media property).
But realizing it was limited in the non-entertainment advertising categories, it made one more deal:
- 05/2005: It shelled out $13.5M for a men’s lifestyle property.
IGN had accumulated losses of $75M when it filed to go public (again) in 07/2005 but was ultimately acquired by News Corp. for $650M in 09/2005, or 40 times EBITDA. Trust me, IGN did not pay anything near 40 times EBITDA, but by sheer dealmaking, it got enough scale to merit that from Rupert Murdoch’s News Corp., and this after he had paid out $580M for MySpace parent Intermix in what we now bill as the Best Web Deal of All Time on the strength of that $900M Google ad deal.
Incidentally, IGN played it shrewd by using cash, and not stock. All of those deals were cash-based. Conventional wisdom states that a buyer use equity etc., and there are many good reasons for that, but in boom times - which we certainly are in - sometimes going against the grain is wise. I am not saying that a buyer should always use cash; nor am I saying a seller should always ask for stock. I am simply observing that in hindsight, sometimes these moves can be brilliant, of course, they can backfire. After all, we look at enterprise value (market value less cash plus debt) because cash on the books in itself has little value (of course, once in a while, it’s why a company buys another). So instead of hoarding it, it frequently makes sense to use to acquire assets when we’re in a land grab mentality, as we are now.
The broader lesson in the M&A landscape, frankly, is that unlike the first golden era of the Web (1994-2000), preserving cash is not as important as it was then, because companies now generate revenues, don’t have massive burn rates and add cash to their coffers quarter over quarter. We looked at some of the major companies “in play,” and indeed things have changed: who knew, for example, that Priceline would be worth $2B? I didn’t. Sure, on Day 1 of its IPO it was worth more than the rest of the entire transportation industry, but that would not last… but for it to be strong after the dot com bubble burst and come back with a $2B market cap? Indeed, things have changed.
With that in mind, I took a look at some companies that could be either buyers or sellers in this market, assuming someone can a) afford them or b) convince them to sell. I won’t make any comment on who I think should be buying or who should be selling. I might do a post on that later this week… And, some of these can be in various categories, IACI, for example, is both media, e-commerce and search.
The companies are, in
- Media: Yahoo!, eBay, InterActive Corp., CNET, TheStreet.com, PlanetOut.com, Roo Group, Salon Media, The Knot.
- Ad Services: Valueclick (we have written quite a bit on privately held competitors Blue Lithium and Tribal Fusion, and of course, Doubleclick and aQuantive - for more on those, just click on the company tags on the left-hand side)
- Search: InfoSpace, Mamma, Miva, Answers, Looksmart, Marchex.
- eCommerce: Amazon, Netflix, TravelZoo, Audible, Priceline, Blue Nile, Overstock, Napster.
To keep things on a level playing ground, we’ll only look at publicly traded firms in this post.
Wouldn’t it be wild if WalMart bought Amazon.com? In 1999, we were all saying when will Amazon.com buy WalMart. Today we know that was in foolish, but how unwise would it be for Walmart to buy Amazon.com? If you are wondering, Walmart boasts a market cap of $194 billion. But, I said we won’t go into such analysis in this post.
Clearly the match-making game of consolidation has accelerated, but there are many suitors left. In fact, I’d argue that some of the best assets are private ones, and no, I’m not saying that being biased running a private company myself. I just think that in all honesty and even wrote about it here as well as in our Top 13 Explosive Web Startups of All Time.
But those who do have cash would be wise to use a combination of cash and stock to scoop up assets, bolster their income statement and maximize shareholder value.
Man, sometimes I wish I was doing M&A for a bank, or lending a hand at a company with plenty-o-cash, a strong stock, and ambition to match…
Disclaimer: Of the companies mentioned above:
At the time of writing, I own ROO, YHOO, MIVA, ANSW, INSP, SLNM.
In the past, I’ve also owned LGBT, VCLK, MAMA, CNET, KNOT, LOOK, ADBL, NAPS.
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