Analysis: Facebook Deal Will Provide Interesting Benchmark for Social Networking Sites

Authored by Jay Baage on September 21, 2006 - 9:24am.

The hunt is on for the next MySpace and big media executives are willing to pay a lot of money for the right company in hot areas such as social networking, online video and gaming. But all of this talk of executives aggressively pursuing acquisitions in this space is jacking up the prices. Is Facebook really worth $1 billion?

Facebook, the number two social networking site in the US after MySpace, is in "serious" talks to sell itself to Yahoo for a pricetag that could approach $1 billion, according to The Wall Street Journal. That is almost twice as much as what News Corp paid for MySpace last year. To keep things in perspective, Facebook has fewer than 10 million registered users, which is far behind MySpace, that has around 109 million users.

One of the factors that has limited the number of members on Facebook is that you need an e-mail address from a college, high school or selected companies and organizations. However, earlier this month, Facebook announced its plans to offer membership to users beyond high schools and colleges, a move that would allow millions of new users access to its online site.

Caris & Company’s e-commerce analyst, Tim Boyd, suggests that: a) $1B does seem like a reasonable price; and b) the perceived value of social networking sites has increased 6x to 8x over the last year.

To come to these conclusions, he is assuming a 65% EBITDA margin (although he is inclined to believe that Facebook’s EBITDA margins are well-above both Google’s and Yahoo!’s due to a lack of public company expenses). A $1B purchase price hence implies a 2006 EV/EBITDA multiple of 15x. To put this in perspective, YHOO currently trades at 12x 2006 EV/EBITDA, Google (GOOG) at 24x, so 15x seems like a reasonable multiple.

So, there are ways to make even a large price tag like this make sense. Then there are other considerations. One of the main reasons Viacom CEO and President Tom Freston got fired was supposedly because he lost out to News Corp. in a bidding war over MySpace. CBS CEO and President Leslie Moonves has said that he would like to find the next MySpace or YouTube, but that is easier said than done. The executives in major media companies are desperate for a good foothold in new media right now.

So the Internet is yet again a hotbed of investment activity, but unlike in the ”Internet bubble” days, today’s firms in play, like Facebook, have viable business models. They have three things going for them that big media firms desire: 1) useful technology; 2) interesting content; and 3) an established network of desireable users. But it is still not easy to find a benchmark for these strategic acquisitions. It is a matter of evaluating every single case on its own. The biggest risk factor for deals of this nature is how long will users stay loyal to the network being purchased. I’m a big believer in super-distribution, viral marketing and social networks as a marketing tool, so I think that Facebook has value to the right buyer. Even $1 billion if there is a smart long term plan involved.

Related Links:
http://tinyurl.com/mvy5s
http://internet.seekingalpha.com/article/17324