Wednesday, June 9, 2010

Google/Invite acquisition

I know plenty of people who know the facts, but none of them will talk*. So I'll just tell you the rumors.

Invite Media was acquired by Google last week. The initial guesses at the purchase price were in the $60 to $70 million range. Peter Kafka now says it was $81 million in cash. The rumors I heard were it was $60 million guaranteed and up to $40 in earnout. Kafka probably has better sources than I do.

Rumors as to revenue and earnings were all over the place. Guesses I heard ranged from $25 million in billings last year and a net revenue margin of 25%, to $50 million billings run-rate and a 10%-15% net revenue margin. The company, rumors say, had recently started to turn a profit.

So, I'm guessing the acquired revenue (real revenue, not billings) was in the $5 - $10 million range. If this is right, then the acquisition was done at a 10x-20x net revenue multiple. My best guess as to multiple is 17x run-rate net revenue**.

This price, though it may seem low to people in the tech community, is incredibly high for people in the ad agency business. For purposes of absurd comparison, during the height of the .com bubble, Razorfish never traded much above 25x revenue. And at that point the people in the ad business (and every other rational person) were selling shares, not buying. Even for rapidly growing online agencies (including SEMs), prices are rarely above 2x-5x net revenue.

The difference is that ad agencies are hard put to create explosive growth (hiring all those people takes time.) The multiple paid for Invite suggests that Google believes huge growth, and scalable growth, are going to happen in the next year or so. This is good for valuations, because the revenue multiple will fall over time, but the companies will grow faster: future valuations will be higher than Invite's.

In addition to being optimistic about the value of other companies, I'm also optimistic for two other reasons. First, I believe that Invite had not yet reached the point where what it had learned was enough to reliably predict how to buy media that would be more effective. When that happens, the game changes. And second, there are fewer quality companies out there than there are companies that need to own one.

There are some concerns with Google/Invite also, but I'll blog about those later in the week.

* Ironically, if I had a single piece of non-rumor information, I wouldn't write this post.
** I get there by backing into expense run-rate from number of employees and typical compensation--which is much lower than their NY competitors--and assuming they are just starting to make a profit.


Anonymous said...

"The multiple paid for Invite suggests that Google believes huge growth, and scalable growth, are going to happen in the next year or so."

Wrong. Google probably didn't put even 10% of the amount of time that you just did into this calculation.

Google throws off $25MM in free cash flow per day. They recently paid $50MM cash for a small social Q&A startup with almost no traction. A $40-80mm purchase of Invite is pure talent acquisition, not a validation of the space or expected growth.

Jerry Neumann said...

I think it would be a mistake to underestimate Google.