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Private Equity Investing in Digital Media Expected to Increase in 2011

April 9th, 2011 8:27PM by Brendon Kensel

Digital media companies are reinventing traditional business models and transforming the distribution of media content, services and applications. The global growth of emerging digital media channels and the convergence of media, marketing and technology are challenging traditional business models and compelling companies to explore alternative revenue models. Advertising remains the leading revenue generator for many digital media companies, but these dollars are often being generated in very creative ways. These rapid and dynamic changes in digital media have also impacted private equity firms and how they evaluate new platform and add-on acquisitions.

Private equity groups are expected to boost their level of investment in digital media in 2011 as they work to protect existing investments, unlock new economic opportunities, and open new markets. The top verticals that will likely attract interest are social networking, mobile/location-based services, niche Internet sites, videogames, and online advertising/technologies. According to the PricewaterhouseCoopers/NVCA MoneyTree Report, $11.6 billion flowed into 2,266 Internet-specific companies from 2008 through 2010. In 2010 $3.8 billion was invested in 729 deals. This robust early-stage to late-stage venture investing in digital media over the past three years indicates that there will be an emergence of category leaders operating in new verticals and leveraging disruptive business models.

Digital Media Companies - Recent Funding & Estimated Value” width=

Source: CruchBase, April 2011

This trend has already become apparent with companies such as Facebook, Twitter, LinkedIn, Groupon, LivingSocial and Zynga. Private equity firms will likely actively pursue established late-stage category leaders as they look to establish positions in market-defining companies before IPO’s. As the public equity markets continue to improve and as IPO’s become a viable path to near-term liquidity, private equity investors will be attracted these companies. As an example, in January 2011 Demand Media (NYSE: DMD), run by former MySpace Chairman Richard Rosenblatt, went public and sold 8.9 million shares at $17 each. Since it was founded, Demand Media had raised approximately $375 million in financing from investors that included Oak Investment Partners, Spectrum Equity Investors, Generation Partners, 3i Group and Goldman Sachs. As of April 9, 2011 Demand Media had a market cap of $1.9 billion.

Recent noteworthy investments in digital media companies include:

LivingSocial – In April 2011 the company raised $400 million from Amazon (NASDAQ: AMZN), Lightspeed Ventures, T. Rowe Price, and Institutional Venture Partners which valued the company at approximately $3.5 billion.

Facebook – In January 2011 the company raised $1.5 billion from Goldman Sachs and DST in a deal that valued the company at $50 billion.

Groupon – In January 2011 the company raised $950 million from Andreessen Horowitz, Battery Ventures, DST, Greylock Partners, Kleiner Perkins Caufield & Byers, Maverick Capital, Silver Lake and Technology Crossover Ventures in a deal that valued the company at $4.75 billion.

Twitter – In December 2010 the company raised $200 million from Kleiner Perkins, Benchmark Capital, Union Square Ventures and Spark Capital in a deal that valued the company at $3.7 billion.

Zynga – In June 2010 the company raised $300 million from Softbank Capital and Google (NASDAQ: GOOG) which valued the company at approximately $4.5 billion. As of February 2011 it was rumored that Zynga was raising another $250 million at a valuation of $7 to $10 billion.

Is it Time to Invest in Online Advertising Firms Again?

July 10th, 2010 7:11PM by Brendon Kensel
U.S. Online Advertising Growth 2009-2014E” width=

Source: Barclays Capital Internet Deal Book, April 2010

The U.S. turned in a fairly robust quarter in Q1 2010, with a GDP increase of 3.2%. Personal consumption expenditures also increased 3.6%. In May 2010 the unemployment rate decreased to 9.7% and personal consumption expenditures increased $24.4 billion, or 0.2%. Greater consumer activity is typically a prime motivator for greater advertising spending. Online advertising revenues in the U.S. were $5.9 billion in Q1 2010, representing a 7.5% increase over the same period in 2009, according to Interactive Advertising Bureau.

Online advertising is the fastest growing segment of the advertising industry. Online advertising spending in the U.S. is expected to reach $24.9 billion in 2010, representing 8.9% growth over last year according to Barclays Capital Internet Data Book. Economic gains, increased broadband Internet access, along with the continued shift of advertising budgets from traditional to digital media is expected to drive online advertising revenues in the U.S. to $37.5 billion by 2014, a 10.5% compound annual growth rate (CAGR) from 2009, which totaled $22.8 billion.

In 2009 online media represented 14.0% of the total U.S. advertising spending while average consumers spent about 22.0% of their media time online. This gap represents a significant opportunity for acquirers and investors of online ad firms as online advertising budgets are increased to bring them in-line with online media consumption. The popularity of social media is increasing this consumption – three of the world’s most popular brands online are social-media related: Facebook, YouTube and Wikipedia.

While online advertising did not fully escape the impact of the recession, its decline in the U.S. was much less severe than that of other advertising media. Online advertising expenditures are expected to surpass newspaper advertising for the first time in 2010

U.S. Ad Spending Across Media 2009-2012E” width=

Source: Barclays Capital Internet Deal Book, April 2010

Search marketing has continued to fuel the growth of online advertising. Search revenues are expected to increase from $11.0 billion in 2009 to $21.3 billion in 2014, a 14.1% CAGR. The $12.8 billion marketers will spend on search in 2010 represents 52.0% of the total online ad spend.

Online video advertising and mobile advertising are expected to further drive digital advertising growth in the coming years. Online video advertising is expected to reach $3.7 billion in 2014, a 32.7% CAGR from 2009 revenues of just under $1.0 billion according to Barclays Capital.

The mobile advertising market also is poised for growth as wireless networks are upgraded and more Internet-enabled smart phones arrive in the market. Mobile advertising in the U.S. is expected to grow from $414 million in 2009 to $1.6 billion in 2014, a 32.0% CAGR.

It is time for investors to update their investment thesis for online advertising firms.

i-Agency M&A Looks Promising

January 19th, 2010 8:31AM by Ronald Wagner

2008 – 2009 saw few interactive agency deals…mainly acquisitions of specialized (social media marketing, analytics, etc.) agencies and some subscale companies looking to be part of a bigger story. Due to the confluence of factors including an improving economic backdrop, increasing ROI focus from CMO’s driving agency service demand, and the capital that has been sitting on the sidelines getting more restless, 2010 is shaping up to be a good year for i-agency M&A. We anticipate that some mid-size players in the $15mm to $40mm revenue range will be active in looking to consolidate, and some larger independents will continue to seek private equity funds to expand transactionally. This all bodes well for a much broader base of prospective interactive agency targets. 2010 should be a great M&A year for the space.

Private Equity Buyouts: Predictions for 2009 Panel Discussion

January 16th, 2009 10:47AM by Brendon Kensel
Private Equity Buyouts Panel

From left to right: Brendon Kensel, Managing Partner of Kensel & Co.; Phil Thompson, General Partner of Alta Communications; Alexander Haislip, Senior Editor of Thomson Reuters' Private Equity Week; Scott Honour, Senior Managing Director at The Gores Group; and Craig Frances, M.D., Managing Director at Summit Partners.

This fall I chaired a private equity event focused on buyouts and predictions for 2009 that was hosted by Pepperdine’s Graziadio Alumni Network of Orange County. The panelists included: Scott Honour, Senior Managing Director at The Gores Group; Craig Frances, M.D., Managing Director at Summit Partners; and Phil Thompson, General Partner of Alta Communications. The panel was moderated by Alexander Haislip, Senior Editor of Thomson Reuters’ Private Equity Week.

In 2008 there was a 30 percent decline in M&A activity according to a recent study by KPMG. Debt became scarce and expensive and many firms began hoarding cash. Loans backing leveraged buyouts fell 61% to about $21.5 billion during the third quarter of 2008, according to data from Thomson Reuters. The drop put the breaks on deal making.

Summit Partners is currently investing from a $3 billion buyout fund that it raised in 2005. The Gores Group raised $1.3 billion for its most recent buyout fund in 2007. Although neither firm relies solely on leverage, debt is an important part of what they do. Frances said that Summit might typically have borrowed up to 6x a target company’s earnings to get a deal done in 2008. Now that multiple has fallen to 3x earnings. Honour said that Gores has gone from 2x earnings leverage to 100% equity in its transactions. According to Thompson, Alta Communications, which last raised a $500 million fund, also has reduced the leverage it uses in transactions.

Frances attributed the “crisis of confidence” to three key factors: a housing bubble whose early indicators of distress were ignored, the availability of cheap money as “the Fed kept rates too low for too long,” and banks attempting to do too many things, chasing money as traders rather than as advisors.

As for remedies, Frances advocated widespread changes to accounting principles, while Honour suggested that consumer finance habits must change and that lenders need a reason to start lending again — both to consumers and to each other.

The main reason leverage ratios are falling is that GE Capital has shut its checkbook. “You had GE lending to a quarter of the middle market buyout deals,” Frances said. “We had a couple of deals we were working on with them where they said they weren’t doing any lending. It wasn’t a matter of multiples.”

Honour reiterated that message. “We use GE a lot and they told us they were done for the year. When there’s that much dislocation, someone is going to step in.”

A video of the event can be found here: http://www.youtube.com/watch?v=fvRQVt2AE-o

Welcome

November 1st, 2008 12:50PM by Brendon Kensel

Welcome to the Kensel & Co. blog. This blog will provide insights and analysis on mergers and acquisitions, private equity investments, venture capital, business strategy, and emerging trends in the media, marketing and technology industries. The authors bring a wide range of expertise on these subjects and I encourage you to visit this site regularly for recent posts.