AOL, HuffPo, Content Farms and Valuation Bubbles

AOL has bought the Huffington Post for $315m, c $300m in cash - GigaOm:

AOL dropped a late-night bomb: it bought The Huffington Post for $315 million, of which $300 million is in cash. My first reaction –- wow! I had called for HuffPo being acquired by MSNBC before the end of 2011. But then those are the perils of the prediction game. The acquisition is not a surprise, considering AOL has been on a buyout rampage.

“Our strategy is to invest in as many brands as we can: brands that cut across devices and distribution channels,” AOL CEO Tim Armstrong told me in a conversation last year, “We will use M&A if we believe that is what is needed and it helps us get brands and helps expand our platforms.” HuffPo buyout is just that. Or what my dear friend Pip Coburn (an investor) would call yet another CEO promise of future bliss.

Is it worth it? After all, some say the HuffPo is just a content farm masquerading as a newspaper (but then, looking at Demand Media's IPO, they are valued at better multiples than newspapers....). We read that expected revenues are about $100m this year (max - estimates go from $60m to $100m) , so that is at least a c 3x revenue valuation (or, assuming a c 10 - 20% earnings levels for example, thats c 15 - 30x earnings) very high for mainstream print media, so can one believe that online media like HuffPo is worth the price? Pulling out the Broadstuff Virtual Beermat, we do a few calcs, and being 'Net Media Optimists we:

- Assume c $100m revenue per annum, mean 50% growth per annum over the next 5 years (very optimistic)
- Assume constant 20% Earnings
- Assume 10% Cost of Capital (ie money in 5 years time is discounted via 10% interest per annum)

The Beermat Spreadsheet tells us that over 5 years the business earns c $180m (in today's money), so they are down c $100m after 5 years. Will they make it back in the valuation of the asset? Assuming the same metrics it seems marvellous - after 5 years the business is doing c $500m, so that a $1.5bn revenue - well, c $1bn in today's money!

Except that it doesn't work that way - the current "3x revenue" acquistion price is building in a huge hope for growth, that is likely (after 50% year on year sales increase over 5 years) to be much less then. Let us say for example that it is a 1x revenue business in 5 years, then that's c $300m in today's money.

So, all in all a $500m return on a c $300m investment over 5 years - an ROI of about 10% per annum, so its about breakeven (I didn't choose the numbers, honest)

In other words, if you believe that they can get a 50% growth per annum, and can sell at a higher price than 1x revenue in 5 years (most mainstream media papers are selling at less today), and you believe they cannot get a better return than 10% with their money anywhere else, then you will believe its a good deal. If you don't believe these things (and they definitely are of the "need to believe before breakfast" nature), then you will come to the conclusion that this is not about long term weallthh creation, but more about short term needs.

But of course, this is a "strategic" deal for AOL to transform itself into an online content company, even to "roll-up" the online news industry (nice try, Dan) and AOL are urgently seeking a new story as others overtake them....

And then in the long term we are all dead, or have moved to our next gig.....

(An aside - fascinating artice about making content with computers and mech turks - downside is eventually only bots will read it...)