Monday, February 20, 2006
Investment Dealers' Digest:
"Media Investing's New Thing: Web2.0
Colleen Marie O'Connor (colleen.oconnor@sourcemedia.com) - February 20, 2006
Six Apart, the creator of social networking site LiveJournal and maker of blogging applications like Moveable Type, just snagged $12 million in a private round of funding from three firms, sources said last week. The series C round, rumored to include Intel, catapults San Francisco-based Six Apart into the thick of an emerging area of Web-focused investments that go far beyond search-related companies. But so far, public market access to that new industry-comprising companies that house content media properties as well as content tool makers-has been nonexistent.
That may seem surprising, given the tremors this new breed of Web-based ventures is causing at traditional media companies, even putting downward pressure on the latter's share prices. However, the new companies are hard to value, and their founders are suspicious of the public route.
In any event, these new blended companies are becoming the talk of the media investment world. "Blogging and social networking are coming together," says one source familiar with companies in the new industry. "We're coming out of the tech bubble doldrums and the next generation of media is online [content-driven companies]."
In the recent past, online search has been the star of Web-focused investing, but that's rapidly changing as investors consider what happens after users conduct a search on Google or Yahoo. Typically, they then click on the links retrieved and move on to other sites, which are chockablock with content--the new "it" zone for advertisers.
Despite the popularity of that dynamic, Wall Street dealmakers haven't been able to cash in via IPO underwriting mandates and have had to settle instead for advisory roles. "We're spending a great deal of our time on strategic advisory assignments," explains Matt Schultz, a managing director at Merrill Lynch who leads its Internet and digital media practice. "Many of these companies and their founders don't necessarily want to go the public-company route, and a sale gives them liquidity and a potentially stronger platform on which to grow."
Investment banks are playing another role as well: advising traditional media companies that are wondering what in the world they should do to respond to a media industry that is shifting at warp speed. At the moment, the dialogue is mostly about which online assets to purchase, banker say.
"The rate of change is increasing dramatically--for the first time, it's difficult for traditional media companies to look forward and have a firm view of what's going to happen," says Dan Richards, managing director in media/leisure investment banking at Citigroup. "Any traditional media company, with few exceptions, is being forced to make more difficult strategic decisions on how they move forward."
The New York Times purchased About.com last year to help gain exposure to online advertising dollars. But when Rupert Murdoch added to News Corp.'s empire by acquiring such online content properties as MySpace--a place where users list favorite pets' names and share videos of new rock bands--that industry instantly became a target.
Web advertising, while still linked to search, is now focusing on content-driven properties that attract eyeballs and hold them there, either by reading content, sharing photos, communicating to other users on the site, or playing games. Two of the more prominent examples of large-scale content sites are CNET and iVillage, often called the templates for new online media.
"The good news is, there are still plenty of advertising dollars out there for everyone to attack right now," says David Liu, managing director of the Jefferies Broadview technology investment banking group. "But it's coming to a head. We're not going to see a dogfight this year, but at some point, traditional media players are going to see their core revenue start to erode."
The online portion is still small, but growing. Research firm eMarketer found that of the $276 billion spent on US advertising last year, only $7.8 billion went to online ads-but that was a 15% increase over the prior year.
M&A v. IPO
As ad dollars begin to shift, online content players have been a hot area in the M&A market over the last year. Traditional media companies have scooped up properties as they begin to understand the true impact of advertising dollars moving online.
While investment bankers concede that the M&A activity prevents a certain number of content players from making their way to the public markets, that's not the whole picture, they insist. There simply isn't much to go by in valuing online content players for the public market.
At the moment, at least, investors can find more value in traditional media companies acquiring content players on a stand-alone basis, according to Peter Beckett, a managing director in the media, communications and technology group at Harris Bank. "As a result," he says, "we continue to see an aggressive M&A market as companies are willing to pay up for strategic opportunities."
What is more, this new generation of online companies--dubbed Web2.0 by some Silicon Valley players--are constructed differently from their forebears, making them less likely to look for IPOs. "These companies are not typically capital-intensive, so you're not seeing the same large-scale upfront investments required the way you did in Internet version 1.0," notes Merrill's Schultz.
And while there's some hope that the IPO window will finally open for this new industry in 2006, many investment bankers believe the situation won't change significantly until 2007.
Meanwhile, the valuations for online content companies remain strong in M&A deals and are comparable to, if not more favorable than, those in an IPO exit, notes Steve Bird, general partner at Focus Ventures, a Palo Alto-based venture capital shop. "It's not such a bad deal," he says of the M&A activity. "If you get a price that is as high or higher than the IPO, and you get cashed out immediately, that has a big impact on our rate of return." "
"Media Investing's New Thing: Web2.0
Colleen Marie O'Connor (colleen.oconnor@sourcemedia.com) - February 20, 2006
Six Apart, the creator of social networking site LiveJournal and maker of blogging applications like Moveable Type, just snagged $12 million in a private round of funding from three firms, sources said last week. The series C round, rumored to include Intel, catapults San Francisco-based Six Apart into the thick of an emerging area of Web-focused investments that go far beyond search-related companies. But so far, public market access to that new industry-comprising companies that house content media properties as well as content tool makers-has been nonexistent.
That may seem surprising, given the tremors this new breed of Web-based ventures is causing at traditional media companies, even putting downward pressure on the latter's share prices. However, the new companies are hard to value, and their founders are suspicious of the public route.
In any event, these new blended companies are becoming the talk of the media investment world. "Blogging and social networking are coming together," says one source familiar with companies in the new industry. "We're coming out of the tech bubble doldrums and the next generation of media is online [content-driven companies]."
In the recent past, online search has been the star of Web-focused investing, but that's rapidly changing as investors consider what happens after users conduct a search on Google or Yahoo. Typically, they then click on the links retrieved and move on to other sites, which are chockablock with content--the new "it" zone for advertisers.
Despite the popularity of that dynamic, Wall Street dealmakers haven't been able to cash in via IPO underwriting mandates and have had to settle instead for advisory roles. "We're spending a great deal of our time on strategic advisory assignments," explains Matt Schultz, a managing director at Merrill Lynch who leads its Internet and digital media practice. "Many of these companies and their founders don't necessarily want to go the public-company route, and a sale gives them liquidity and a potentially stronger platform on which to grow."
Investment banks are playing another role as well: advising traditional media companies that are wondering what in the world they should do to respond to a media industry that is shifting at warp speed. At the moment, the dialogue is mostly about which online assets to purchase, banker say.
"The rate of change is increasing dramatically--for the first time, it's difficult for traditional media companies to look forward and have a firm view of what's going to happen," says Dan Richards, managing director in media/leisure investment banking at Citigroup. "Any traditional media company, with few exceptions, is being forced to make more difficult strategic decisions on how they move forward."
The New York Times purchased About.com last year to help gain exposure to online advertising dollars. But when Rupert Murdoch added to News Corp.'s empire by acquiring such online content properties as MySpace--a place where users list favorite pets' names and share videos of new rock bands--that industry instantly became a target.
Web advertising, while still linked to search, is now focusing on content-driven properties that attract eyeballs and hold them there, either by reading content, sharing photos, communicating to other users on the site, or playing games. Two of the more prominent examples of large-scale content sites are CNET and iVillage, often called the templates for new online media.
"The good news is, there are still plenty of advertising dollars out there for everyone to attack right now," says David Liu, managing director of the Jefferies Broadview technology investment banking group. "But it's coming to a head. We're not going to see a dogfight this year, but at some point, traditional media players are going to see their core revenue start to erode."
The online portion is still small, but growing. Research firm eMarketer found that of the $276 billion spent on US advertising last year, only $7.8 billion went to online ads-but that was a 15% increase over the prior year.
M&A v. IPO
As ad dollars begin to shift, online content players have been a hot area in the M&A market over the last year. Traditional media companies have scooped up properties as they begin to understand the true impact of advertising dollars moving online.
While investment bankers concede that the M&A activity prevents a certain number of content players from making their way to the public markets, that's not the whole picture, they insist. There simply isn't much to go by in valuing online content players for the public market.
At the moment, at least, investors can find more value in traditional media companies acquiring content players on a stand-alone basis, according to Peter Beckett, a managing director in the media, communications and technology group at Harris Bank. "As a result," he says, "we continue to see an aggressive M&A market as companies are willing to pay up for strategic opportunities."
What is more, this new generation of online companies--dubbed Web2.0 by some Silicon Valley players--are constructed differently from their forebears, making them less likely to look for IPOs. "These companies are not typically capital-intensive, so you're not seeing the same large-scale upfront investments required the way you did in Internet version 1.0," notes Merrill's Schultz.
And while there's some hope that the IPO window will finally open for this new industry in 2006, many investment bankers believe the situation won't change significantly until 2007.
Meanwhile, the valuations for online content companies remain strong in M&A deals and are comparable to, if not more favorable than, those in an IPO exit, notes Steve Bird, general partner at Focus Ventures, a Palo Alto-based venture capital shop. "It's not such a bad deal," he says of the M&A activity. "If you get a price that is as high or higher than the IPO, and you get cashed out immediately, that has a big impact on our rate of return." "
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