Last week I published a piece explaining what drives M&A, namely:
- The six variables that drive prices in M&A
- The Great Merger Movement
- The various startups competing within the seven segments of online video
- The reasons that companies buy other companies
- The threats against a return of M&A activity in online video
- The likely next step in M&A activity in online video.
Today, Tech Crunch published a post I wrote on Ten Likely M&A Deals, where the buyers will be driven by two things, which is illustrated by this graph, which captures the main challenge of media companies:
Check out the Ten Likely M&A Deals.
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With $50 billion in cash, a number of buyers are looking for growth opportunities, and few areas stoke excitement like online video.
However, does that mean online video startups are about to press the cash register?
Defining Total Return
An investor’s Total Return is equal to income gain plus capital gain.
Income gain refers to the money you generate from operations; capital gain the one-time windfall you generate when you sell the asset. When you invest, the former is the present, the latter the future. This is why some investors sustain losses for years in the hope of the big exit down the road.
With a stock, income gain is the dividends a company pays out whereas capital gain is the difference between what you sell the stock and what you paid for it initially. With startups, profits are elusive and dividends a dream; it’s all about the big exit, be it in an M&A (mergers and acquisitions) or an IPO (initial public offering). With the IPO market all but closed, most investors look for M&A to cash out.
In this article, we will look at:
- The six variables that drive prices in M&A
- The Great Merger Movement
- The various startups competing within the seven segments of online video
- The reasons that companies buy other companies
- The threats against a return of M&A activity in online video
- The likely next step in M&A activity in online video.
Former CEO of CBS Interactive Quincy Smith has joined with CBS Interactive EVP Michael Marquez and music industry veteran dealmaker Fred Davis to launch CODE Advisors, a new Silicon Valley and New York based investment bank. Smith and Marquez led the acquisition of CNET while they ran CBS’ corporate development team (something I called, by the way, over a month before it happened).
Here is the interview they did with Tech Crunch’s Michael Arrington:
One of the largest media companies in Canada, Canwest (one of our many distribution partners) is in bankruptcy protection. They own a variety of cable channels as well as newspapers.
I was curious to see what exactly was causing Canwest’s malaise. Not surprisingly as with most media companies, it had something to do with them over-extending themselves. Also not surprisingly, somehow, someway, US investment bank Goldman Sachs, had the upper hand. First the details, then my thoughts:
In early 2007, CanWest made a $2.3-billion acquisition of Alliance Atlantis Communications, mostly because it coveted its clutch of cable channels.
For a company that used to make its living airing The Simpsons and Everybody Loves Raymond, owning the History Channel was a high-brow venture.
Unfortunately, it was also an expensive one; CanWest had no ability to borrow that kind of money, and Alliance management opted for cash, not CanWest shares. (Now those guys knew what they were doing.)
Thus was born the putrid deal between CanWest and Goldman, which Mr. Asper famously described as “renting” the investment bank’s balance sheet.
Though complicated enough to confuse a quantum physicist, the contract could be summarized as follows: CanWest retained approximately 35 per cent of its television business, plus voting control, plus the ability to earn a bigger stake over time, depending on how much the business earned. Goldman inherited 65 per cent of the business, plus – crucially – a put option that gave it the right to sell its stake back to CanWest at a predetermined price, for a guaranteed return.
You can see the problem with this.
One party – Goldman – had a great deal of upside, but limited downside. CanWest, on the other hand, had all of the pressure of trying to squeeze as much out of the assets as possible, but all the risk if it went badly.
CanWest shareholders, events later proved, had unlimited downside: Their shares are now essentially worthless.
The “billion-dollar put,” to borrow a phrase from BMO media analyst Tim Casey, has been like a noose ever since.
Read more. I don’t see how Goldman is the villain here, they had the upper hand then and negotiated a smart deal. I also don’t see how Canwest could be blamed here. They took a risk (something that is generally frowned upon north of the border, or at least, not as revered as it is south of the border) and the risk backfired. The only thing I find strange is that the CRTC (the Canadian watchdog overseeing media) frowns upon foreign media ownership, yet they were cool with essentially having a US bank call the shots with regards to equity ownership of Canwest. I am not blaming them either, but I do find it all very etrange.
According to stats from TubeMogul, Media Memo reports that YouTube’s push into monetizing more and more of their inventory is starting to pay dividends, if not in actual dollars and cents, at least in terms of proportion of monetizable views.
It’s worth asking, what makes up “YouTube Partner”? Obviously, YouTube has been courting big media, and new media companies like our own WatchMojo constitute that chunk, which begs the question, does it make sense to create professional videos for the Web when UGC continues to be popular and traditional media turns to the Web for digital distribution?
From my recent (and second) article on MediaPost:
As an online video content producer, the first question I was asked back in 2006 was: Does it make sense to produce professional video content for the Web, when user-generated content is so popular?By 2010, it’s clear that while social media changes the rules of engagement in publishing and news, UGC will never win over advertisers; professional content will continue to filter audiences for marketers.
Today, the question has evolved to: Does it make sense to produce professional video content for the Web, when Big Media is looking to the Web for commercial and promotional opportunities?
According to media analyst Craig Moffett, “five companies” — Time Warner, Disney, Viacom-CBS, Comcast-NBC Universal, Fox — “control 85% of video-viewing hours in America. At the end of the day this train ain’t going anywhere that those five companies don’t agree to.”
Indeed, as viewers increasingly watch video online, Big Media is in a strong position. In reality, though, television and film companies’ playbook is reminiscent of that of the record labels. When you consider that new media shrinks old media, you can’t really blame them. So between marketers’ lack of appetite for UGC and Big Media’s reticence to open up their archives online, it’s clear there’s a major opportunity here — in between the cream of the crop and the bottom of the barrel.
But, from the perspective of just media consumption, this begs the question: Is there really a need to produce professional videos for the Web when UGC remains popular and traditional media companies are — albeit slowly - turning to digital distribution?
Unbelievably, YouTube is only five years old, but it is the undisputed king of online video, accounting for nearly 40% of the 33 billion monthly streams that are generated each month in the US.
Today co-founder Chad Hurley published a quick post commemorating the anniversary, touching on its three tenets:
#1 - Video gives people a voice
#2 - We succeed when our partners succeed
#3 - Video evolves fast, YouTube must evolve faster
Honestly, no question about #1.
I also don’t doubt that in theory they believe in #2 and #3, but as a leading content provider to YouTube (nearly 4,000 videos and aggregate views of over 50,000,000 on YouTube alone - and 115,000,000 everywhere) it would be nice if YouTube actually really understood what it needed to do to make #2 a reality and #3 actually true.
But, that being said, I give YouTube a lot of credit for being ahead of the curve relative to their peers on a number of issues (see surprise #10 in this article I wrote on Tech Crunch).
As a consumer, YouTube is my favorite site, so regardless of my occasional frustration with the site as a business partner, net-net, it’s all good. Incidentally, I recall back in 2006 when we had just launched WatchMojo.com, I would email YouTube and Hurley’s co-founder Steve Chen would answer himself. Suffice to say, times have changed. No wonder I ranked YouTube as the most explosive startup ever.
I’ve previously written about VCs draconian terms and how they miss the boat with their crazy investing strategy which leaves more carnage than successes. Today, Tech Crunch published my fifth article in a month, entitled Where Did VCs Go Wrong In Online Video?
Yesterday’s final implosion of video site Veoh, which declared bankruptcy after burning through $70 million of venture capital, was a long time coming. A lot of so-called smart money went into Veoh: investors included Goldman Sachs, Time Warner, Intel’s venture arm, Spark Capital and former Disney CEO Michael Eisner. And it was hardly an isolated incident. Joost, another high-flying video startup launched by the founders of Skype, went through $45M in VC money before ending up in a fire sale. Who’s next?
More importantly, why is so much venture capital that funded video startups going down the drain when the number of videos watched on the Web is going through the roof?
Nowadays, it is fashionable to discredit VCs as financial engineering hacks with no operational talent who lack the moral compass required to lead people; but that would be unfair. VCs, it turns out, are neither the problem nor the solution: good ones might offer more than cash, bad ones will kill your business. And once killed, they’ll blame everything and anyone but themselves.
Read the rest here.
If you’re like me you were absolutely horrified when Burger broke up with Carrie on a yellow post it note with, “I’m sorry. I can’t do this. Please don’t hate me.” - Burger
Today, according to the recent stats on TechCrunch, face-to-face break ups are no longer necessary!
Mobile social network MocoSpace has released a study that revealed that 57% of people have broken up with someone by a text message! And 1 out of 3 people have “text flirted” with someone while on a date with someone else! How rude!?
No wonder I’m still single…sheesh
Part 4 of our series on Tech Crunch is up. I updated our rudimentary pyramid from 2007:
with this one. It’s a work in progress and I will add more layers to it:
A few notes on it:
- Triangle represents all video content online
- The line above UGC represents professional content, be it super premium, premium and prosumer.
- Circle represents content producers; outside of circle represents aggregators.
- The Profitability Index captures
a) Profit margin on operations,
b) Total Return on Investment as measured by income and capital gain,
c) Likelihood of positive Liquidity Event.
- Center of circle represents highest Profitability Index because production costs are lower and rights are less restrictive. It is also the best risk/return adjusted investment opportunity when measured by ROI.
- After all, only the #1 aggregator has real value, though the #2, 3, etc., content producer can still have a lot of value to a would-be buyer.
- DailyMotion, Veoh, Metacafe, Break and YouTube all began as aggregators of UGC and then shifted towards premium/super premium content, but today they house everything.
- Break, in particular was an aggregator of UGC but is now moving towards more and more premium content and is producing premium content as well after acquisition of HBOlab aka Runawaybox from HBO.
- UGC Producers splintered into Prosumer and UGC, clearly some of the top prosumer producers are massive commercial / promotional endeavours now, some of which even have successful ad models.
- The budget levels and production quality within Premium varies considerably.
- Super Premium producers will need to offer more online to remain on top over time as Premium producers embrace the Web and offer more content to users.
Now read the Post.
