Monday, July 25, 2011

Q2 2011 - Digital Media M&A and Financing Update




M&A is Active


47 M&A deals in the Digital Media sector closed in Q2 2011.  With the exception of Microsoft’s announced acquisition of Skype, most deals in this last quarter were small, under $1 billion. We expect 2011 to show further improvement in transaction volume and value. 

There is strong support for recent valuations of social media sites. In 2000, Price/Earnings (PE) ratios for UK listed technology companies peaked at close to 90x, compared to a wider multiple of around 25x for the market as a whole.  Today, the PE ratio for listed technology companies of 16x is only slightly higher than for the overall market multiple of 15x, with a similar picture in the US. PwC shows that PE for listed technology companies are down since 1999…

For businesses in sectors like social media, PE is not necessarily the best metric on which to draw valuations PwC partner Ian Coleman says: “When you look at value per user metrics, the valuations for some of these businesses begin to make more sense.” So they have picked another metric - value per user…

Global M&A activity dips in Q2 vs. Q1, but is up overall in 2011 vs. 2010
According to Thompson Reuters, Global M&A for Q2 2011 came in at $710 billion for 9,664 deals, compared to $786 billion (10,410 deals) in Q1 and $553 billion (10,407 deals) in Q2 2010. Private equity M&A deal activity came in at $70.53 billion for 961 deals, compared to $53 billion for 983 deals the prior quarter. Q2 2010 had been $51 billion for 880 deals.
The driving sector in M&A for the first half of 2011 was "high-tech" with a 13.5% market share of dollars, followed by real estate (13.4%) and consumer products/services (12.2%).

The leading region for PE M&A deal activity in the first half was the Americas, although it's lead over Europe dropped from 55.4% in the first half of 2010 to 44.4% in 2011 (even though the actual deal totals increased).

Strong Venture Investment Activity

There were 28 venture investments greater than $10 million in Q2 2011, worth a combined $1.2 billion.  During the quarter, there were three investments with transaction values above the $50 million. Among the largest investments announced during the quarter were Dorsey’s Payment’s $100 million capital raise from Kleiner Perkins Caufield & Byers, Spotify’s $100 million investment by DST, Kleiner Perkins and Accel, and LivingSocial’s $400 million investment.

Venture capitalists poured $2.23 billion into hot social media companies in the second quarter of 2011, according to Wall Street research, up from $643 million one year ago. The influx of money comes as some of the biggest social media upstarts are going public, or preparing to do so, and reflects huge investor demand for a piece of the action.

Social media investments in the second quarter declined from the first quarter, when venture capitalists poured a whopping $3.17 billion into companies, but that figure is inflated due to Goldman Sachs’ $1.5 billion investment in Facebook, and Groupon’s $950 million fundraising round. Excluding those two investments, second quarter VC investments in social media companies rose by 35 percent compared to the first quarter,

Social commerce companies saw the largest infusion as investors jumped on the daily deal bandwagon, hoping to ride the coattails of market leader Groupon, which is growing wildly and preparing an IPO.


IPO Activity – The flood gates are open

Already this year, LinkedIn (NYSE: LNKD), the business-focused social network, has gone public, and now has a market capitalization of over $8 billion. Social gaming site Zynga filed IPO documents last week, and aims to raise at least $1 billion, and as much as $2 billion. Groupon, the social commerce leader, filed IPO documents last month, and hopes to raise at least $750 million.

The following six companies that have either gone public this year, or are expected to within the next 12 months:

Demand Media: The company runs a web registrar operation and a content business anchored by eHow, a massive repository of low-cost articles on virtually every subject imaginable. The company pays thousands of freelancers to produce articles it hopes will have a longer shelf-life than traditional news articles. Demand went public in January and saw its stock jump 33 percent.
IPO: January 16, 2011. Raised $67 million. Open: $17. Last close: $13.27.
Revenue: $253 million
Net Income (Loss): ($5.3 million)
Revenue growth: 48 percent
Valuation: $1.11 billion
P/E: N/A
Competitors: Yahoo (NSDQ: YHOO), AOL
Challenges: Demand is heavily dependent on Google (NSDQ: GOOG), which has been moving aggressively to crack down on low-quality content. As a result, Demand is focusing on increasing the quality of its content and growing its traffic from social media like Facebook.

LinkedIn: The social network for professionals has over 100 million users. Its shares soared as high as 109 percent in its first day of trading in May.
IPO: May 19, 2011. Raised $353 million. Open: $83. Last close: $90.66.
Revenue: $243 million
Net Income (Loss): $15 million
Revenue growth: 110 percent
Competitors: Facebook, Monster
Challenges: LinkedIn (NYSE: LNKD) is growing rapidly, but needs to begin generating substantial profits in order to justify its sky-high valuation.

Pandora: The internet radio service went public at $20 two weeks ago, then dropped sharply, as early investors cashed out. Since then Pandora (NYSE: P) stock has moved back up toward the offering price.
IPO: June 15, 2011. Raised $235 million. Open: $20. Last close: $19.02
Revenue: $167 million
Net Income (Loss): ($17 million)
Revenue growth: 136 percent
Valuation: $3 billion
P/E: NA
Competitors: Sirius (NSDQ: SIRI), Clear Channel (OTCBB: CCMO), Apple (NSDQ: AAPL), Google, Spotify
Challenges: Pandora faces crushing royalty payments due to the major record labels, and unless there are structural changes in the nature of those royalty agreements with the labels, half of Pandora’s revenues will continue to pour into label and rights-holder coffers.

Groupon: The Chicago-based daily deals service, filed IPO documents with the SEC last month. The company hopes to raise $750 million.
Revenue: $713 million (2010), $645 (2011 Q1)
Net Income (Loss)): ($413 million)
Revenue growth: 1,463 percent
Valuation (est): $15 billion to $25 billion
P/E: NA
Competitors: LivingSocial, Google, Facebook
Challenges: Groupon’s biggest challenges are the low barriers to entry in its market—dozens of clones have sprung up—and an impending wave of competition from major players like Google and Facebook.

Zynga: The creator of popular online video games like FarmVille and MafiaWars filed IPO documents last week. The company aims to raise at least $1 billion, and as much as $2 billion.
Revenue: $597 million (2010), $235 million (2011 Q1)
Net Income (Loss): $91 million
Revenue growth: 135 percent
Valuation (est): $15 billion to $20 billion
P/E (est): >300
Competitors: Electronic Arts (NSDQ: ERTS), Activision
Challenges: Among the current crop of internet IPOs and IPO prospects, Zynga stands out for the simple reason that it is profitable, and substantially so. But Zynga shouldn’t become complacent. Ironically, Zynga’s rapid rise is illustrative of the fast-changing nature of the internet commerce. The company is on top now, but for how long?

Facebook: The world’s largest social network with over 600 million users is widely expected to public next year, and could raise $10 billion at a valuation of over $100 billion.
Revenue (est): $2 billion
Net Income (Loss) (est): $400 million
Revenue growth: Unknown
Valuation (est): $70 billion to $80 billion
P/E (est): 190
Competitors: Google
Challenges: Facebook is king of the social web. Google has thus far failed to make major inroads into the space, despite being the company best positioned to do so. It’s too early to know whether Google’s recently announced +1 service will dent Facebook.

For the complete report (free download), including valuation tables, go to:   www.techmediamergers.com