Strategies for a discontinuous future.

Tuesday, March 14, 2006


Despite the hype about the Knight Ridder deal, the price multiple (1.5x revenues) isn't atrocious relative to the precarious strategic situation of the entire industry.

Though it's low relative to other media markets, and especially for the 2.0 crowd, the last big newspaper acquisition was probably Tribune + Times Mirror, at a multiple of about 2.15 - and that was at the height of the boom.

-- umair // 3:22 AM //


Valuation approach is wrong.

The industry is not valued based on P/Revenue - its more like EV /EBITDA. the P/Rvenue is Non meaningful.

As far as 2.0 goes - they are also completely different. Most are early stage - therefore no comps on pulbic valuations - if there are there is significant discounting on illiquidity. again can't compare.
// marks ramblings // 5:48 PM

Hi Mark,

Thanks a great deal for the tips :)

You're incorrect on both counts.

We simply want to understand if KRI was relatively underpriced or overpriced. So we have to compare the relative value of the transactions - not value each company by itself (which is where EV might be appropriate).

In this case, nearly any cap/topline multiple you use is likely to be valid as long as mgmt factors and industry structure are economically comparable (lke they are in this case).

I think you will also be hard pressed to seriously value early stage plays without understanding how to use public comps cleverly - for example, to understand what a network effect is really worth, we have to resort to, for example, MySpace, eBay, or maybe Amazon.

This is where (the not totally insane) acquisition prices for 2.0 plays ultimately come from in the first place...

Thanks for the comment.
// umair // 8:11 AM

Ok - i am pulling research on how the street values KRI's sector - will revert with source. But i'll go out on a limb here and pretty much guarantee that the street does not value this company on a multiple of its revenue. It will most likely be on a multiple of EBITDA.

More interestingly, as this relates directly to what i do, your comments on the 2.0 valuations.

Firstly lets seperate financings rom Acquisitions. Series A's are basically 1 for 1-1.5 give or take - no real science in this as the risk profile for a Series A is more a punt than an elegant financial set of defenses.

On the acquistion side, with the early 2.0 guys, the traditional methods we used to use were Comping the company against its public peer s (as i believe that is what you were saying) and applying illiquidity or 'risk' discounts to the multiple. (sometimes an Illiquidity discount of 25+%)

Secondly, to the extent that one can gather data, one can apply a precedent M & A multiple to the equation.

Thirdly, the traditional DCF method (non meaningful in most instances here for obvious reasons)

And finally, the Intangibles or network effect as you call it. I will go along with the premise that the 2.0 guys might get a premium on similar stage non 2.0 companies because of this micro-irrational-exuberence around it.

Pull all toghether, the apex being a defendable value calculation for the business.

Every early stage business that we have sold has used in some part public Comps. You may also have not mentioned the earn-out aspects of this. when a company sais it sold for $15m - its higly likely it sold for the possibility of reaching 15m over time. I have lost count on how many times i've seen releases on values - knowing full well (as in some cases i negotiated it) that the earn-out component of the deal makes it almost misleading to place the value on the deal at that stage.

Will revert on KRI deal specifics.

Love your posts BTW - very sophisticated and thought provoking reading.

// marks ramblings // 7:15 PM

Update on KRI from the street:

Morgan Stanley writes:

'the valuation works out to b about 10x 2006 EBITDA well below the 10 year trailing industry average of 13x EBITDA and a testament to growing secular pressures on the industry'

'we derive our target valuation price of $68 for KRI based on TEV/EBITDA and DCF analyses'

I have emailed you the research.

As i said - EV/EBITDA is a prominent tool in valuing this deal relative to both market and M & A precedence.
// marks ramblings // 7:40 PM
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