Economic Outlook Optimistic, Fueled By New Market Forces

Even as the Bogeyman occasionally skulks about on Wall Street, defiant forces are spurring media and related Internet deals into 2008, defined by some new rules and expectations.

Free market dynamics keep the deal engine chugging despite nagging concerns about the credit crunch, weak U.S. dollar, mounting high-cost debt, tumultuous emerging markets, and retrenching private equity and other lenders. That's because the baseline objectives remain constant. Money gets behind the best ideas, best management and best practices in global and digital arenas bursting with opportunities. The smartest and most able companies win, delivering a huge windfall to investors.

The record amounts of liquidity among private equity, venture capitalists, banks and wealthy individuals will be invested more cautiously. Valuations and growth forecasts will be adjusted, and break-up fees will be taken more seriously. Some $40 billion in deal commitments from the first half of 2007 have yet to be funded, but there is many times that in available money that has to be put to work somewhere.



One of the big differences now is a longer timeline for the turnaround payout governing private equity plays (about one-third of all M&A) through any economic slowdown and more gradual digital transitions. That may actually give some media- and Internet-related entities some much-needed creative breathing room.

The Internet, online advertising, and many media sectors are considered high-growth areas that can yield strong return on investment and are somewhat insulated from economic uncertainty. A formidable stumbling block to defining and growing their value (deal or no deal) is the development of more accountable and credible metrics. Even real-time user-generated data still has a long way to go. User measurement, profile and response go beyond advertising and marketing to the very heart of what defines a company's worth, for both buyers and sellers.

That said, there are a huge number of innovative start-ups, flourishing niche businesses and even larger players whose products and services are strategic must-have acquisitions for bigger media and Internet players. Even some of the bigger companies are being driven by high overhead and legacy costs to merge in order to be a stronger, more spry competitor.

Such activity was evident in third-quarter media deals that surged to a total $95 billion, up 110% from $45 billion in the same period of 2006, drawing from traditional and Internet properties, according to Jordan Edmiston Group. The impetus for roll-ups, buy-outs, joint ventures and outright consolidation has never been greater despite the underlying economic ebb and flow. Here are some of the other considerations that will continue guiding deals.

The fourth quarter of 2007 is an advantageous time for fledgling companies to be acquired and rolled into bigger media and Internet concerns seeking to strengthen or extend their holdings. Examples are everywhere, from NBC Universal's $875 million acquisition of Oxygen announced Tuesday, EchoStar Communications' $380 million acquisition of Sling Media, to Microsoft's $6 billion acquisition of aQuantive and Google's proposed $3.1 billion purchase of DoubleClick. Among the many speculated acquisition targets: ValueClick, RealNetworks, Gemstar-TV Guide, Home Shopping Network Facebook and Skype.

  • Conversely, media conglomerates that may spin off some of their assets to more fully realize their value and create new stock deal currency include Time Warner (AOL, Time Inc.), News Corp. (Fox Interactive Media and MySpace), and General Electric (NBC Universal).

  • The high cost of digital conversion will prove too much for smaller analog TV station owners, who will either sell out or be shut down by the federally mandated conversion in February 2009. Whether or not it is related to that watershed event, there have been more than 90 TV stations for sale in roughly 63 markets reaching about 28% of U.S. TV households, according to Bear Stearns. The piecemeal sellers include LIN TV, Nexstar, News Corp., Montecito and Lincoln Financial, ideally looking for 14-times earnings. Highly leveraged and stock deals have been at risk in light of the pressure on financial markets and acquisition multiples.

  • Valuations remain high, partly because of a buoyant stock market, and they are not going to get any cheaper. The five-year bull run that has driven the S&P up more than 100% is expected to continue several more years, even as quarterly earnings slow. Sellers and buyers may move to lock in prices now.

  • While the pace of growth may temporarily slow everywhere but on the Internet, many media companies have record cash on hand to invest and aggressively transform their operations rather than continue to buy back their stock. The levels of digital investment and changes in existing corporate structure and operations by many existing media players have been surprisingly minimal.

  • Some of the biggest spenders are the so-called new-media giants, in the throes of their own unique transformation. Microsoft is expanding on its software base to become a full-fledged advertising-supported Internet service provider and multi-platform digital player. Even Google, at more than $600 a share, is figuring out how to put its massive advertising infrastructure to work to get into the social networking game. Microsoft and Google--each with about $30 billion in cash to burn--will involve hundreds of smaller players in the process through joint ventures and acquisitions.

  • Digital revenues and windfall profits will be relatively modest for a while, but eventual returns will be huge. Merrill Lynch has said that by 2010, it expects digital businesses to account for up to 9% of earnings for media conglomerates such as News Corp., Walt Disney and Viacom, and as much as 21% at Time Warner on digital revenues growing annually at about 40%. During this period, digital growth will account for about 20% of cash flow growth, but as much as 47% at Time Warner. Even with Disney expecting more than $1.5 billion in digital revenues this fiscal year, the media majors still have a long way to go.

  • The battlegrounds for formidable future growth--the living room digital hub, mobile content and advertising, social networking, and online display advertising--are fostering countless deals among strategic players. The downloading, transfer and management of entertainment, marketing and communications centered on the digital living room hub is an estimated $150 billion revenue opportunity being hotly pursued by Apple, Microsoft, Sony and TiVo.
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