Bearish Fallout For Media

It's only a matter of time before the fallout from the Bear Stearns bailout, intensifying finanical market turmoil, and the tightening economic squeeze catch up with all companies. Media-related players--from communications and entertainment to the Internet to advertisers--will see the impact in advertising revenues, consumer spending and the availability of funding for deals and expansion in the second half of the year. Even well-heeled media players with limited ad exposure will feel the pain.

The reason is that at the heart of it all is the flow of money among investors, financial institutions, advertisers, consumers and companies. It is about the shifting valuations of companies and the extent to which circumstances can play havoc with their worth. It is about growing risk aversion and the tightening of liquidity. It is about the unwieldy perception of abiding, destructive uncertainty that results in cautious spending.

It is difficult to digest the extraordinary factors contributing to Bear Stearns' lightning-fast collapse and fire-sale valuation. To be sure, there are troubling universal implications to the matters of liquidity and the valuation of assets (both tangible and intangible) at the heart of Bear Stearns' plight. To the extent it applies, this unprecedented situation holds warnings and instructions for all. Perhaps the most important is paying attention to the factors that can adversely impact a company's valuation--beyond the price oppression of a bear stock market. Bear Stearns' valuation problems were rooted--like that of so many other financial institutions--in bets it made on subprime and other mortgages, the paper for which has been severely diminished. It also had a prime brokerage business awash in "net payables," backed by no real money. The underlying issue is the disastrous consequence of unstable asset values going to zero.



Media companies, like many industries, are placing bets on new technology and business models while their traditional business models are deteriorating. They are increasingly resorting to a variety of new metrics and formulas to track their return on investment. The complexities of tracking traditional revenues under siege and emerging revenues not yet steadied will pose financial accountability problems that will become increasingly evident. Add to that heavy investing in digital infrastructure and the carryover (for some) of costly, increasingly ineffective legacy operations, and media has its own lethal financial squeeze in the making. No way will new digital revenues ramp to replace traditional revenues as rapidly as they are deteriorating. A weakening economy has made advertisers and consumers more conservative about spending money.

Google appears to be the only company positioned to beat all the odds. Henry Blodget points out that Google last year captured two times as much revenue of its online rivals (Yahoo, AOL and Microsoft) growing 15% or $1.3 billion. With one-third of its $2 billion in ad revenue growth last year coming from its AdSense third-party partners, it's worth noting that Google grew its ad revenues twice that of some 13 offline media companies combined. Whatever ad-dependent companies are losing due to a weak economy is being exacerbated by the Google steamroller. The uncertainty and radical shifting of core revenues has made all so-called new and old media players uneasy about forecasts and valuations which, as Bear Stearns demonstrates, can be all too fragile.

Less than a year ago, Bear Stearns was trading at $150 a share. Even with the federal government's backing of about $30 billion of its most questionable assets and securities, Bear was sold to JP Morgan Chase for $2 a share, or about $236 million--the value of its midtown Manhattan headquarters which JP Morgan is guaranteed if the deal falls through. It was that or bankruptcy, which would have had broader, dire ramifications. The biggest underlying problem that doesn't disappear with Bear Stearns is rooted in financial investors committing what Blodget says is $30 of borrowed money for every $1 real dollar invested. That kind of smoke and mirrors building--as well as deconstruction--of value can catch up to any industry seeking to leverage uncertainty.

On the flip side, entrepreneurs and enterprise builders view times like this as prime for opportunistic buying--with JP Morgan Chase's takeout of Bear setting the new bar. Self-funded investors can take advantage of undervalued stocks in a bear market, and the paralysis that will keep rival bidders at a minimum. Indeed, a panel of online content experts I moderated at the OMMA West conference in Hollywood Monday agreed that the economic downturn will only help--not hurt--building value from the ongoing digital interactive transformation. The rationale: content providers and distributors, advertisers and consumers will be more receptive to trying new things and build value in new ways. But that will take time. An annual report on the State of News Media released Monday estimates it could take traditional media another decade to "right" its business models, citing that advertising dollars are dramatically lagging consumers' move to the Internet.

Investors, advertisers and even venture capitalists will become even more cautious in these times about seeing a timely return on investment for every dollar spent, even as it is difficult in most cases to measure performance with certain metrics.

Although the Internet roll-up, tuck-in deals will continue to lead this year's vastly diminished M&A along with hard-won consolidation (like Micrososft's buyout of Yahoo), there is no doubt that the Bear Stearns event will give pause to everyone in the valuation business. Perhaps the most frightening thing about the Bear Stearns situation is just how swiftly a major financial institution's liquidity collapsed and its value was reduced to half of what it was trading the day before its sale was announced and to what it should have and could have been. To the point, $2 a share represents a fraction of the $7.7 billion break-up value of Bear, as assessed by Bernstein. The implication that such trouble will continue to tear through the financial services sector--undercutting many of the companies and funds that stand behind media, Internet and advertising companies in flux--adds to a time of great uncertainty. Accurately determining valuations may be the biggest challenge of all in these tumultuous times. And, then again, it could be as simple as what Bear showed us this weekend: a company under duress is worth exactly what a buyer will pay for it.

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