February 8, 2011

You've got Huffington - what's the deal?

- $315 million AOL is paying for Huffpo, 6.3x projected revenue for 2011 (high for comparable deals) and 31.5x EBITDA

- "AOL is paying a hefty price" that looks better when evaluated by page views but "AOL, more than anybody, should know the risks of putting too much store by page views when it comes to valuation" (WSJ)

- $1.8 billion paid by CBS for CNET in 2008 - only 4x revenue

- $25 million paid by AOL for TechCrunch in 2010 - only 2.5x revenue

- $300 million in cash and $15 million in AOL's declining stock (dropped another 3.4% after this deal was announced)

- 25 million unique visitors a month to Huffington Post - 22% growth Dec 2010 vs. Dec 2009

- Only 15% of traffic to Huffpo is now to their politics sections (i.e. 85% to "non-politics")

- 112 million unique visitors a month to all of AOL's sites

- $51.9 billion - market for online advertising in US in 2010 - 14% growth

- Big drops in revenue and traffic for AOL

- $50+ million in projected 2011 revenue for Huffpo

- $10 million in projected operating profit before depreciation and amortization for Huffpo
- Started to turn a profit half-way through Q3 2010

- 148 editorial staffers at Huffpo (before merger)

- Ariana Huffington will become President and editor-in-chief of AOL/Huffpo's combined 700 editorial employees

- AOL says it can raise ad rates on Huffpo, cut costs on overlapping areas, use their premium content and low-brow aggregation technology and their understanding of new, new media (i.e. synergies and cost-cutting and great culture fit)

- Huffington says her editorial strategy will be to combine aggregated content (i.e. the low brow stuff meant to be "search engine bait") and original reporting (more "high-brow stuff")

- $100 million estimated valuation in December 2008 for Huffpo when Oak made a $25 million investment (bringing total investment to over $32 million); Oak gets a 3x return on investment after 2 years

Phil's take: This was a great almost-all-cash deal for investors in Huffington Post. Heads they win, tails AOL investors lose. Why? 2/3rds of all mergers fail. So, without knowing anything about this deal, odds are against it. What happens to those odds once you learn something? Mergers fail for mundane reasons of too-high valuation (check), culture fit problems (check), and over-optimistic "synergies" (check). Failure hurts AOL's current investors but Arriana Huffington gets cash and could end up taking over all of AOL and running a smaller but more profitable business.

Comscore chart from the Wall Street Journal:

- AOL News had 35 million unique visitors in December 2010

- Huffington Post had 24.5 million

- Compare to New York Times Digital (69.7), Yahoo New Network (94.5), etc.