Like everyone else, I’ve been wondering about the Huffington Post AOL deal. Being the analytical sort, I’m also a little disappointed in the quality of the coverage about the numbers and financials. No one seems to think that a price equal to 5 times sales seems higher than you typically see. This post is an attempt by me to suss out the numbers from various web articles and offer a back of the envelope calculation.
The first place to look in in the official press release. Here we find HuffPo Monthly Unique Visitors (25 million), the purchase price ($315 mill), and HuffPo’s Growth Rate (25% per year). This article from the AP states that HuffPo had a 30% profit margin and $50 million in sales. Of course, it isn’t quite that simple since this article indicates 2010 sales of $50 million and this one indicates 2010 sales of $30 million. To keep things somewhat under control, I’m going to use the numbers from the press release as authoritative (since the SEC puts you in jail if you lie), and try scenarios for all three revenue numbers.
First, I’m going to use break even analysis to see how many unique visitors are needed for AOL to break even on its investment. The calculation will be Sales Price / Profit Per Unique Visitor.
|Monthly Unique Visitors||25,000,000|
|Profit Per Visitor||$0.78||$0.60||$0.30|
|Break Even Visitors||403,846,154||525,000,000||875,000,000|
That’s a lot of unique visitors (and will take some time at 22% cagr), but the analysis is a little flawed, since it doesn’t take into account the time value of money or that the users may accrue over a period of time.
In order to understand how the investment looks over time, i will use the Internal Rate of Return (IRR) calculation. The table below shows the IRR for both the high and low profit scenarios from above (that is .78 or .30 cents per unique visitor), but it assumes that unique visitors will grow at 22% annually (the 2009 to 2010 growth for HuffPo according to the press release). The IRR calculation begins with a negative $315 million first cash flow ( the price of the investment) that isn’t shown in the table.
|High User Profit||23,790,000||29,023,800||35,409,036||43,199,024||52,702,809|
|High Total Profit||44,790,000||50,023,800||56,409,036||64,199,024||73,702,809|
|Low User Profit||10,980,000||13,395,600||16,342,632||19,938,011||24,324,373|
|Low Total Profit||31,980,000||34,395,600||37,342,632||40,938,011||45,324,373|
In the highest profit scenario for the investment the 5 year IRR is -2.58% and the low profit scenario is almost -15%. That tells me that in order for this merge to yield a positive return for the investors, management will either need to grow the number of users faster than the historical rate or increase profits per unique user substantially above where they are now.
- Because the investment requires that management substantially improve performance, there is no margin of safety.
- Many articles talked about the purchase price as being a 5x multiple of revenue. But that number appears from the articles to be the future revenue and not the past (or trailing) revenue. With a trailing revenue of $30 million, the $315 million purchase price appears to be more than 10x sales.