Right now, good mid market ($5 million - $500 million in revenue) businesses are trading for 6 or 7 times EBITDA which often equates to around one times revenue for a well-run business. There are, of course outliers, but as a general rule, multiples are way down from their pre-crash highs when bank debt was available to leverage up returns.
The Huffington Post's founder, Arianna Huffington, has confessed that her site only just turned its first profit last year on a reported $60 million in revenue. So why would AOL pay more than five times revenue and an almost infinite multiple on earnings?
Because they are looking at a different number to value what Ms. Huffington has built.
Media companies are often valued on their traffic, which I bet is how AOL came up with its offer. The New York Times reported yesterday that The Huffington Post has 25 million unique visitors per month, which means AOL is paying roughly $12 per unique monthly visitor ($315 million divided by 25 million). AOL will have done the math to know that their advertising sales reps and systems can monetize 25 million uniques and -- over time -- get a return on their investment of $12 each.
In fact, The Huffington Post deal looks somewhat cheap on the basis of unique visitors when you compare it to AOL's acquisition of TechCrunch in September of last year. Although initial rumours suggested the deal price was $25 million, CNBC reported sources close to the deal pegged the acquisition price at $40 million. If we take the $40 million reportedly paid by AOL and divide it by TechCrunch's roughly 1.5 million monthly unique visitors, you get a price of around $27 per unique monthly visitor. Given how educated, rich, and tech-savvy the TechCrunch audience is, you can see why advertisers would want to pay a premium to reach them. AOL clearly thinks it can monetize the TechCrunch eyeballs at a higher rate than Ms. Huffington's audience.
And I think that is the lesson within The Huffington Post / AOL deal. When pricing a business, beauty is in the eye of the beholder. Before you decide what your business may be worth using a simple multiple of EBITDA, it may be worth asking yourself if you have some other hidden assets someone would pay good money to buy.
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