Expect more social networking trade sales

28 Mar 2008

As the market considers the implications of AOL’s US$850m acquisition of Bebo, social networking advertising is expected to exceed US$2bn in 2008, and a corporate financial adviser predicts more mid-size deals in the area.

Corporate finance firm Cronos Partners says although AOL’s acquisition of Bebo was conducted at a lower valuation multiple than that applied by Microsoft in its US$240m payment for a 1.6pc stake in Facebook, the Bebo deal represents a massive boost to other smaller companies in the sector, particularly those which have sprung up in Europe.

David O’Reilly, director of London-based Cronos Partners, says the purchase of Bebo underpins AOL’s strategic re-alignment from a traditional dial-up internet provider to a digital advertising player.

“Companies like AOL that are making this transition fully appreciate the potential for revenue growth and service expansion offered by social networking sites as a tool for capturing customers and tracking eyeballs online.

“Large public companies such as News Corp that entered the market early via acquisitions are well positioned as a result of their early belief in the market’s potential. For example, News Corp’s investment of US$580m to acquire MySpace in 2005 is estimated to be worth more than US$15bn today, were the company to be sold or listed,” O’Reilly said.

According to Cronos, Bebo occupies the No 1 slot in the Irish social networking market, and is one of the top sites in the UK market next to Facebook, the current market leader there. Bebo has around 100 staff based in the UK, San Francisco and Texas. A typical Bebo user spends an average of 33 minutes per day on the site.

Cronos says the social networking market continues to grow rapidly despite widespread global difficulties in certain sectors of the economy, such as financial services. In 2008, global ad spend in the social networking arena is expected to exceed US$2bn, with a global spend of over US$4bn forecast by 2011.

According to O’Reilly, consolidation in the social networking sector is going to continue in the small to medium mid-market range of deal size – mostly deals less than €250m.

“In particular, where indigenous, home-grown players can demonstrate a combination of a rapidly growing, active user base with enhanced features and functions to make their sites less ‘static’ and more exciting.” O’Reilly continued.

Although the majority of future transactions in the sector will not be “mega-deals” such as Bebo and MySpace, Cronos expects valuation multiples to remain high where strategic buyers in the international media sector are competing against each other in structured auction processes.

By John Kennedy