AOL overpaid for HuffPo. Can deal pan out?
A once-massive Internet service provider that is struggling to turn itself into a content powerhouse, AOL is paying $315 million for HuffPo, or approximately 10 times the reported HuffPo sales of $31 million in 2010.
With the stock of AOL trading at a bit under 1x its revenues for the last 12 months, Arianne Huffington and her fellow owners will get a 10x larger share of AOL than HuffPo’s sales would have contributed to AOL in 2010.
Financial analysts call this a dilutive transaction, because it transfers value away from the rest of the stockholders and delivers it to the owners of the acquired company. From a strict financial point of view, therefore, AOL significantly overpaid for HuffPo.
Why would AOL chief Tim Armstrong do this? Because he evidently believes HuffPo’s sales will rise much faster than those of his own company – and that the affiliation with AOL will accelerate HuffPo’s growth even more than if it had remained independent. Here’s his likely thinking:
With approximately 3.7 times more web traffic than HuffPo’s 13.4 million monthly unique visitors, AOL can steer additional traffic to HuffPo from a wide array of sites ranging from Patch.Com to TechCrunch to Moviefone. The graphic below from HuffPo illustrates the vision for the combined companies.
AOL also has a far larger ad sales operation than HuffPo, which ought to be able to surpass the $50 million to $60 million in revenues that HuffPo likely would have achieved this year if it remained a free-standing company.
If HuffPo’s revenues triple this year to $90 million, then Armstrong can tell his shareholders he paid “only” 3.5x more for HuffPo than its sales are worth. If HuffPo sales triple again to $270 million in 2012, then the value of the deal is likely to be about 1x HuffPo’s revenues at that point and Armstrong, assuming he remains on the job, can tell the skeptics he was right.
The question to ask yourself in evaluating the long-term financial benefit of the acquisition to AOL is whether you think HuffPo is capable of bringing in a $270 million in annual sales within a couple of years. Do you?