10x Revenues

Companies don't really sell for multiples of revenue, but the math is easy so everyone does it.

I've read that Doubleclick sold for 10x their revenue of $300mm.

And that Right Media sold for 12x their annual revenue of $70mm.

Please correct me if I am wrong on these numbers as I am just relaying what I've heard and don't have access to the financials of privately held companies.

I believe that ultimately price needs to be factored as a function of EBITDA - earnings power. It could be the present value of future cash flows, it could be a mutiple of current EBITDA, it could even be a multiple of the cash flow that a buyer believes it can get by merging the asset into its business.

So when I see online advertising assets trading at north of 10x revenues, it makes me think that it's the latter factor at work.

I've heard that AOL monetized their acquistion of Advertising.com buy running all of their unsold inventory through Ad.com and that they got a tremendous return on investment from doing that.

So that may be the play for Yahoo! with the Right Media acquisition. And thus a multiple of current revenue or even cash flow is largely irrrelevant.

But even so, these are large numbers being paid and as a part owner of three online ad networks (TACODA, FeedBurner, and TargetSpot), I am thrilled to see these trades print.

Comments

[Cem Sertoglu]

I agree. The revenue multiple is just a figure arrived at post-deal. It think it's meaningless to talk about a revenue multiple, similar to a number of employees multiple. It just gives the deal figure another dimension.

[mark]

I agree. Sue Decker @ YHOO echoed your view when she said yesterday that the value for RM was mainly based on what they can go w/ it. However, to your pt re: AOL+Ad.com, AOL could have monetized all of their unsold inventory thru ad.com even if it didnt own the business and still make out well (though paying ad.com a ~5% fee). Same could be said of the YHOO+RM combo.

[Didier DURAND]

Business Week gave a 20x ratio (revenues estimates: 150 millions)

See http://www.businessweek.com/technology/content/apr2007/tc20070414_675511.htm?chan=top+news_top+news+index_businessweek+exclusives

didier

[Michael Hoffman]

I think it is true that these x revenue numbers come after the fact, though I also think there are exceptions. Sometimes, businesses in the same market expect to match the metrics that have been reported in acquisitions of their competitors -- "if they got 10x revenue we need 10x". And there are also cases where there really are no clear metrics. I am thinking about YouTube. I heard at one point the YouTube number was a factor of the MySpace number and certainly it didn't come from a real clear view of monetization potential, which we are all just learning about.

[Bobby Martyna]

I think that the free cash flow multiple (and hence the ability to service debt) is what is becoming increasingly important, especially if private equity is looked upon as an exit.

[Dan Malven]

Can't the same be said of Yahoo's acquisition of the Flatiron portfolio company Yoyodyne back in 1998? Maybe you could help your audience understand these valuations by sharing some insights at what happened to Yoyodyne business post acquisition (I think YHOO was able to monetize it well?)

[Jose]

I talked to a CEO of a company that's spent over $200M in the past 12 mos buying online classified sites in the real estate market who said that their valuation method is TTM EBITDA X Growth Rate (which I assume means if you're growing ebitda at 40%, it's 40x ebitda).

So the key is ebitda, but heavily influenced by growth rate. And it makes sense because if you're mainly dealing with properties that generate <$5m in ebitda and tend to be fast growers, their owners are looking at 12x ebitda and thinking, "well my ebitda is $500k today, but I'm growing so fast that it could easily be $750k or $1M in a year, so I'll just wait and sell for 1.5x or 2x more in a year."

At the end of the day, the valuation needs to be compelling enough to pay for the owners' growth expectations.