Feb 15, 2001
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We first met Phillip Won when he contacted us last Summer to see if we'd make a good acquisition for internet.com. There's not a lot of distinction in this, because Won contacts sites like us every day of the week. In fact if Internet-related B-to-B content companies like us were shoes, Won would be Imelda Marcos' personal shopper. As such, he probably has more experience in ezine acquisitions and valuations than almost anyone else in the industry. So, we contacted him this week to tap into a bit of it on your behalf.
Q: Before we plunge into M&A talk, what's up with the rumor of editorial staff cut-backs that somebody sent F***dCompany.com about you?
Won: internet.com has been profitable for the last four quarters. We're growing everything. We're not going to cut any aspect back. I guess that rumor is just as reputable as the site it's on.
Q: How have valuations of email newsletters changed over the past year?
Won: Valuations have come down dramatically all across the Internet mediums whether it's email newsletters, Web sites or whatever. The pendulum has shifted from irrational exuberance to the other extreme.
A couple of years ago valuations were all about Web side metrics: how many users, subscribers, newsletter deliveries per month. We were giving one to five times of whatever particular multiple we were looking at. It was fairly comparable to public transactions. Today because everybody is scrutinizing everything, we've definitely steered away from multiples.
It all changed about six months ago to really how much money are you making? Maybe Wall Street hasn't gotten it yet. We've always said that these online publishers are old media just a different distribution. You can have a Web site that has millions of subscribers, but that doesn't mean crap if you don't have a sales force selling ads on it.
I think this is going to be status quo for the rest of the year, especially in the next 6-9 months. Everybody's projecting continued softness in the ad space at least this quarter and probably next quarter. So you're not going to see valuations pick up dramatically.
Q: How have these lower valuations affected the acquisition scene?
Won: The expectations of acquirees are still very high. However, most of them are in positions where they don't have to sell. In a typical week I might speak to 5-10 prospective candidates. Based on current market conditions, for the majority of them it probably would not be a smart thing to sell at this point.
Then, we always find companies that are in less of a desirable financial situation. It's an opportunity for us to come in and basically save them. Their other prospect is going bankrupt and laying off people. In today's environment, there are extraordinary opportunities for those like us that have the cash to pick and choose the companies out there that are not in such a good position.
It's also a great opportunity for smaller companies that are also doing well. They should be going out and looking at possible roll-up strategies as well. It's a question of are you a profitable company, do you have the cash? For private companies you can do a private stock transaction. If you can maintain a decent cash flow position, you can go out and buy these companies. Quite honestly some of these companies don't have other alternatives.
Last quarter was tough for a lot of companies. Next quarter will be tougher. A lot of companies losing money will have another losing quarter. It's going to be even better for a company like us to go out and cherry pick.
Q: What does internet.com look for in a potential acquisition?
Won: We just don't go out anymore and buy companies to enlarge our portfolio. We've gotten to a certain size already. Now we're in the mode where we're not going to buy anything that's losing money day one. Now that not a single site out there is more than 30-35% sold out in ad inventory, acquisitions are no longer a function of we need more inventory.
We're looking for companies that are profitable. Not only do they have an ad sales force and are generating decent revenues, but are they a company that ran lean and bootstrapped it, and have the mentality of bottom-line profit? We also look at what's the revenue risk going forward. Do they have a grasp of the infrastructure it takes on the editorial, on IT, on sales and are they balancing that to make a profitable company? Can we make them profitable because of synergies between our current properties?
We look at trailing 12 month revenues, trailing 12 month EBITDA. We give sort of a multiple based on our past experience, and then we look at the forward 12 months revenues and forward 12 months EBITDA. Sometimes they are only a year old so trailing doesn't reflect enough.
We also look at how it would fit into our network and is it a site we need as far as inventory? It would have to be in an area where there's some need in our company. We want to acquire the one to three sites or properties in a certain segment. Companies that have come out of the pack. We're a little less concerned with infrastructure. We have operations and IT. We're looking to take over good editors and really good sales people all the time.
Ultimately it comes down to how good are the revenues and how good will they be in the future. Are we going to make money?
Q: How do you typically structure deals?
Won: We like to buy the company based on a fixed consideration up front. If we feel the risk is higher than we're willing to stomach, then we come to an interim solution -- a two-stage acquisition with some reduced earn-out component based on a milestone such as revenue on a 12-24 month horizon.
If it's a stand-alone company with a handful of founders that own 90%, we do an earn out to the corporation and they can divvy it out amongst shareholders. If it's a company that has multiple outside investors, then it gets a little more dicey. We have to structure the deal so outside investors feel they're getting enoughvalue, plus we give incentives for those employees coming on board.
We have to tailor every single deal we do. We don't have a cookie cutter solution.
Q: Aside from advertising revenues, how is internet.com diversifying income these days?
Won: We just announced a partnership with dice.com a few weeks ago. They are one of the top IT job recruiting sites. We'll promote them within our various media properties for a share of the revenue.
We have seminars, small conferences and breakfast forums. We'll continue to grow those in line with the regional Web sites of internet.com.
Prior to 6-12 months ago I'm almost positive we didn't syndicate a thing. Now we're definitely working with other sites to syndicate content. We don't work with distributors. We do it all on our own. We have a fairly tight hold on how we syndicate our content.
We're also selling value-added white papers and research on allNetResearch. It's not a stand-alone business, that's one of the benefits of having such an infrastructure around it. It's an incremental cost for us. It's been holding its own. It's only a matter of time before it really starts picking up.
Q: What about back article sales? Most newspaper sites have a for-fee area where people can read archives. Have you considered that?
Won: It goes against the grain of our philosophy. Since day one we've always felt content should be free (except for allNetResearch where we're selling products.)
We only have a handful of sites where we charge some type of subscription. We just don't believe in the subscription model. You want to build your traffic and have a user base so you can maintain your CPM rate and be able to boast about the number of eyeballs you're generating on your site. You're potentially limiting that by having subscriptions.
Alan Meckler has always said if WSJ.com had our philosophy and did a non-subscription model from day one, they would be the biggest online media company in the world today without a doubt.