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Digital Media M&A Update - Q4 2011 And 2012 Outlook

|Includes:AOL, BBRY, CNVR, CTCT, GOOG, IAC, LFGR, LPSN, MCHX, QNST, RLOC, Yahoo! Inc. (YHOO)

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Q4 2011 - Global M&A Update

According to MergerMarket, global M&A for 2011 totaled $2,178.4 billion, up 2.5% from the same period in 2010 ($2,125.9 billion), making it the busiest year since 2008 (which was at $2,405.8 billion). 12,455 deals were announced in 2011, 1.3% below the number for 2010 (12,296 deals).

Activity did, however, decrease over four successive quarters, with $432 billion-worth of deals announced globally in Q4 2011, down 22.5% from Q3 2011 ($557.5 billion). Fourth quarter activity was 39% lower than in Q4 2010 (US$ 708.1bn), with the lowest quarterly total since Q3 2009 (US$ 325.4bn).

2011 was the busiest year for cross-border M&A since 2008, in spite of a gradual slowdown in M&A activity after the first half of the year. Cross-border deals (by individual countries) announced in 2011 added up to $874.4 billion and regional cross-border deals were up to $593 billion, an increase of 9.8% and 19.6% respectively since 2010, which saw $796.7 billion-worth by country and $495.7 billion-worth by region. 2011 booked cross-border deals between individual countries accounting for 41.5% of global M&A activity, the second highest proportion since 2007 when $1,564.4 billion-worth accounted for 42.8%.

According to The 451 Group, acquirers spent $219 billion by purchasing 3,690 information technology, telecommunications and Internet companies around the world in 2011-a 17% increase in spending and a 13% increase in number of deals year-over-year.

The total dollar value increase was led by multibillion-dollar strategic deals from top-tier technology companies such Hewlett Packard (NYSE:HP), Google, Microsoft, SAP and Texas Instruments. Mega deals included Microsoft's $8.5 billion purchase of Skype, Google's $12.5 billion successful bid for Motorola Mobility patents, Texas Instrument's $6.5 billion acquisition of National Semiconductor, HP's buyout of Autonomy for $11.7 billion, and SAP spending $3.65 billion to acquire human capital management software vendor SuccessFactors.

It was also noted that the Media, Information, Marketing Services and Technology sectors in the U.S. booked nearly 900 transactions in 2011 totaling $47 billion, a 9% increase over 2010.

Emerging market (BRIC) buyout activity, valued at $32.3 billion, accounted for 11.6% of global buyout activity in 2011, up from 11.5% in 2010, and the highest contribution since 2009 (19.1%). Europe is the region that invested the most in the emerging markets in 2011, accounting for 40.2% of cross-border deal value ($80.4 billion): the UK, France, Germany and the Netherlands accounting for 21.1%, 17.6% and 9.6% (for both Germany and the Netherlands) of European-related inbound deal value respectively.

The global average deal size for Q4 2011 was $291 million, the lowest Q4 average since 2007 (at $277m).

Cash-only was the preferred structure for cross-border deals in Q4 2011, with cash-only deals accounting for approximately 94% of the value of all cross-border deals announced in Q4 2011, compared with 90% in Q3 2011.

In all, technology acquirers increased M&A spending for the second year in a row. Moreover, total deal count hit its highest level since 2006, as M&A activity across sectors and across value continues to rebound from the downturn of the 2008-2010 recession.

Multiples and Deal Premiums

The average premium (one day before) of global M&A deals for publicly listed companies in Q4 2011 increased to 33.5%, driving the annual average up to 28.5%, up from 22.2% in 2010. North American premiums averaged 35.9% in 2011, an increase from 31.6% in 2010. Meanwhile, European premiums for the year averaged 21.9%, the second highest average since 2002, only topped by 2008's average of 22.9%. The Asia-Pacific region saw an average premium of 21 %, again the highest average premium since 2008 (24.1%).

The average EBITDA multiple across global M&A in 2011 was 12.6x, down from 14.9x in 2010 and the lowest average since 2003 (10.6x). The European average EBITDA multiple in 2011 was 12.1x, the second-lowest since 2004, and 11.5x in 2009.

The quarterly average global EBITDA multiple decreased in the last quarter of the year to 12.1x, from the previous quarter's 15.8x, a drop driven by significant decreases in North America and Asia-Pacific, from 16.3x in Q3 to 12.8x in Q4 in North America, and from 20.4x to 10.1x in Asia-Pacific. Europe, however, showed an increase in the average EBITDA multiple on M&A deals in Q4 2011 to 15.3x, up from 14.4x in Q3 2011.

The TMT (Technology, Media & Telecoms) sector recorded the highest average EBITDA multiple - at 15.7x - in 2011, overtaking 2010's leading sector Energy, Mining & Utilities which averaged 19.5x.

Digital media M&A

Recent announced M&A Transactions in the Digital Media sector for Q4 2011 and YTD 2012 include:
 

  • RIM acquires NewBay for $100 million at approximately 5.0x LTM Revenues
  • Yahoo acquires Interclick for $270 million at 2.0x LTM Revenues
  • Rakuten acquires Kobo for $315 million
  • Facebook acquires Gowalla (undisclosed)
  • Google acquires Apture and Katango (undisclosed)
  • Evolve Media acquires RealityTea.com, WebEcoist.com (Jan 2012)

The sectors with the largest disclosed median enterprise value multiples for all of 2011 were Broadcasting with 3.8x revenue and Internet Media at 17.5x EBITDA.

The median revenue multiple rose from 1.5x in 2010 to 1.9x in 2011. The median EBITDA multiple moved slightly from 10.4x in 2010 to 10.6x in 2011.

The sector with the largest increase in volume in 2011 over 2010 was Online Marketing with a 29% increase from 332 transactions in 2010 to 428 transactions in 2011.

2012 M&A Outlook

We expect M&A activity to remain steady for 2012 and possibly uptick further if the lending environment eases globally. While Europe is in economic turmoil, the U.S. is stabilizing. Emerging markets such as Brazil, Argentina and China are all on the upswing and in growth mode. We expect some financial buyers (private equity) to remain on the sidelines while strategic buyers (companies) will acquire to capture growth.

Buyout firms accounted for around 16 percent of company takeovers in 2011.

Volatile equity markets slowed mounting U.S. deal activity in the third and fourth quarters, following growing deal momentum in the first two quarters of 2011. In light of concerns over Europe and a pullback in financing, U.S. merger and acquisition activity in the second half of 2011 was driven by well-prepared dealmakers focused on executing acquisitive growth strategies and availability of businesses with strong fundamentals- a key trend expected to continue into 2012, according to PwC's Year-End U.S. M&A Outlook.

Sellers now are looking for both speed and certainty in a deal, and also pursuing various alternative options and scenarios as they proceed as a way of maximizing the asset's value. With sellers in the driver's seat, buyers must remain poised and ready when deal negotiations continue for a prolonged timeframe. Overall, the M&A markets are on track to stabilize further and increase overall over the next few years.

As for the Facebook IPO, it is planned to go out between April and June 2012 and will raise around $10 billion at a $100 billion valuation, according to Bloomberg news sources. Facebook's revenue more than doubled to $4.27 billion 2011 from $2 billion in 2010, research firm EMarketer Inc. said.

M&A TABLES AVAILABLE IN FULL REPORT

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Generation Equity Advisors, LLCis an independent investment bank and M&A advisory firm focused exclusively on the global Software, IT Services and Digital Media industry sectors. We advise buyers and sellers of companies and efficiently execute transactions to increase shareholder value. Our professionals have advised on $20+ billion in M&A transactions to date and have current relationships globally with technology and media companies as well as leading private equity firms.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.