Ezaro Media

The exciting Open Data agenda

On February 15^th Pro Bono Publico and Access Info Europe organized the first Spanish barcamp on data driven journalism. The event took place in Madrid, at Medialab Prado. The videos can be accessed here.

The Open Data agenda has been pushed forward by the US and UK administrations since 2009. It focuses on making government data publicly available for its reuse, preferably in machine readable formats. The objectives sought by these policies are at least twofold: (1) introducing greater transparency in the political process; and, (2) the development of a new generation of public services.

Developers, designers and civic activists world-wide have covered a lot of ground over the last couple of years. New software applications have mashed up different datasets to create exciting, freely available new knowledge.

We can now, for instance, scrutinize public spending, address official questions to government, keep a closer eye on our political representatives, report deficiencies in public infrastructure, cross reference housing data with official crime statistics, etc.. All of this online. Specialist new media such as the Guardian Datablog (UK) or The Story (Ireland) are currently at the forefront of innovation in this area from a journalistic perspective in Europe.

Spain is currently lagging behind in this global movement. Different public administrations are dipping their toes in the water, but right now, with very few noteworthy exceptions, newspaper headlines are well ahead of reality. The datasets opened up by these administrations (central, regional and local) are just not up to the task. They lack genuine interest (content) and/or their quality is very deficient (format).

Other pending issues in Spain include the long-awaited legislation covering right of access to public information, or the unresolved approach to data licenses. There isn’t such a thing as open data unless license terms are adequate and clearly stated, setting forth, for instance, the framework for potential commercial exploitation.  

This notwithstanding, associations like Pro Bono Publico have begun to make significant contributions towards the advancement of this open Data Agenda. Its member David Cabo, for instance, has developed the Spanish equivalent of the UK’s Where Does My Money Go. It is called ‘Donde Van Mis Impuestos’. Other apps have been and will be developed in the context of the ‘Desafío AbreDatos’ contest.

At EZARO MEDIA we believe in the huge sociopolitical and commercial potential of this open data opportunity, and will be monitoring developments to try and be a part of it.

Lessons from Demand Media’s IPO

Demand Media is a US-based digital content and domain registration business with over 100 million monthly visitors. Its model is based on generating advertising revenues from commercial exploitation of its content (59% of revenues) and charging wholesale domain registration fees (41% of revenues). Demand Media obtains revenues both from its ‘Owned and OperatedWebsites’ as well as a ‘Network of Customer Websites’.

Demand Media went public yesterday in an IPO that was priced above the indicative range –at US$17 per share– and valued the company at US$1.4 billion.  According to Venture Source, this valuation made Demand Media the largest technology IPO since 2007. The company’s initial trading soon took that valuation to US$23 per share, implying a market capitalization of nearly US$1.8 billion. To reach an Enterprise Value proxy, we must deduct the proceeds from the IPO of US$151 million

In its pre IPO filing, the company reported 1H 2010 revenues of US$114 million. Using the company’s 2009 revenue distribution between the first and second semester, estimated full year 2010 revenues would stand at US$248 million. The company is still mildly loss-making. In contrast with most digital content businesses, Demand Media amortizes its incurred content generation costs over a 5-year timeline, hence lifting its short term profitability.

From a trading multiples perspective, the IPO implied a valuation of 5.0x LTM (Last Twelve Months) revenues, with the secondary market fast moving that valuation up to a lofty 6.6x LTM revenues. And this for non profit generating business with annual revenue growth in the 25% p.a. region. Not a bad marker in the sand for entrepreneurs and investors who own similar businesses elsewhere.

Beware of the yield!

There are sectors where M&A activity typically takes the shape of dual or multiple stage deals. We are referring here both to deferred consideration, which can be fixed or adjusted in the future according to a pre-agreed formula, and to put/call option arrangements.

Sectors involved include those where value is largely provided very directly by the key personnel who own the business subject to the transaction. We can find plenty of examples in marketing services, strategic consultancy or financial advisory, just to name three areas or sectors.

In these transactions prospective buyers try to reduce risk levels by partly matching outflows (payments to sellers) with inflows (access to cash flow from the business acquired).

One element often not closely looked at by sellers and/or their advisors is the yield calculations implicit in such an offer. Apart from overall value and other typical offer related parameters (e.g. type of consideration, contractual provisones, etc.), it is highly advisable that sellers represent buyers' cash flow profile whilst the negotiations take place.

In doing that a view must be formed about whether or not this risk mitigating strategy put on the table by the seller is reasonable or excessive. A key reference point in this exercise must be the average ratios (FCF yield, dividend yield) offered by comparable publicly traded companies.

It is not uncommon to find financial savvy acquirers who formulate prima facie attractive offers that, once stripped of the headline value element, and when closely looked at, result in a sale (say of a majority stake) pretty much being financed from day one by the very same business being acquired/sold.

This is particularly relevant when the acquirer gets control of the target company from day one (i.e. when over 50% of the business is immediately transferred as part of the deal). These are the scenarios where a more significant imbalance might arise, with the buyer minimizing the cash paid upfront and largely financing the takeover with the cash flow/dividends generated over time by the company being acquired.

What are the exact risks? For one the fact that, regardless of the contractual agreements and conflict resolution provisions in place post deal, there are plenty of examples out there of big tensions arising after the initial signing. Scenarios don't play out just the way they were foreseen, relationships erode, reinterpretations become tempting... And the seller has not received the significant compensation that ought to go hand in hand with the transfer of effective control of the business to the seller.

If you are an entrepreneur thinking about selling your business, and as per the title, always get a trustworthy advisor and beware of the yield (especially if you are paying it to someone else)!



Welcome to our blog

This week we kick off Ezaro Media's blog. Here you will find info about our new entrepreneurship projects, proprietary investments and advisory assignments. Follow us in our coverage of the Communications and Technology space both in Spain and internationally. We are very excited about the future and the immense possibilities on offer!