CBS acquires Last.fm, eBay buying StumbleUpon

Acquisitions are being announced every day now. CBS, the TV network, will acquire Last.fm, the streaming music service. eBay, the auction company is buying StumbleUpon, a social bookmarking service. A while ago eBay bought Skype, a free VoIP telephone service.

Acquisitions are usually about synergy, market share, cost savings, leverage, or strategic moves into new markets. Hmmm...what will CBS do with Last.fm? And what will eBay do with StumbleUpon? The synergy isn't obvious to me now, but acquisition strategies play out over many years.

My good friend Ashkan Karbasfrooshan over at HipMojo wrote a brilliant piece today on the music business and acquisitions in that space. Ash suggested that Apple should acquire one of the major music labels. His analysis of the traditional music business versus the online music business was interesting. But, his financial analysis of the stock market implications of such a merger really made me stop and think. Think about this excerpt from the HipMojo post;

How Much Would Owning the Music Add to Apple’s Bottom Line?

Say the percentage of WMG (Warner Music Group) and indie songs sold is actually 25% (and not 33%), that represents 500M songs, which at $1 would help retain $500M in profits for Apple...Using the example above where a company buys the indies and smallest major record label for about $3B would add $500M in profits, which would in turn add 500M x 35 P/E = $17.5B in market value for Apple

So, if Ash's estimates are correct, Apple could buy Warner Music for $3B and the stock market would immediately reward Apple with an additional $17.5B in market cap. Now that is a deal that would make an investment banker smile.

Companies with high Price/Earnings ratios should buy companies with lower P/E ratios. From a financial point of view this makes obvious sense. However, most acquisitions are not done with financial engineering in mind. They are done for strategic reasons. And usually the tables are reversed. The big companies with lots of cash and low P/Es are acquiring the small hyper-growth companies with astronomical P/Es.

Music, television, and radio companies have low P/E ratios and stock market caps compared to technology companies.  Entertainment content is mashing up with technology as digital distribution of music and video move to the Internet. We have seen this coming for a long time. Steve Case saw it when he merged AOL with Time Warner. It was the classic high P/E technology company acquiring the low P/E content company. It was too early in the evolution and the synergies didn't materialize.

Maybe the time is now right for traditional content companies to merge with technology companies. CBS and Last.fm may be the first of many such mergers.

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Comments

[ashkan karbasfrooshan]

That's awfully kind of you Don. Thanks for the kind words.

Technically, Apple can't get into the music biz anyway, by way of the 1991 agreement between the two firms, but since a new agreement cancelled that one in 1997, I don't see why - if Apple Inc. wanted to badly enough - try to get a new agreement giving them wiggle space in music content (they are after all indirectly/directly in music now by way of iPods/iTunes).

Like you say this is more about financial engineering. I don't for a second see Steve Jobs courting Britney Spears etc.

Bono? That's another question...

[Marc Cohen]

I think the notion of Apple - or another technology company (MS?)- buying a label is interesting. Companies like Apple are becoming to music like CBS or NBC are to television shows. CBS and NBC own the content.

Also, I think your financial analysis is a bit off. Buying WMG might bring $500 million in revenue to Apple, but not $500 million in profit. The new revenue brings cost with it.

Check out the Ad-Supported Music Central blog: http://ad-supported-music.blogspot.com/

[kayvaan]

still no way to export contacts AFAICT. if there is, someone let me know. to me, inability to export data is a hallmark of overly aggressive data policies. the product should be good enough to keep people using it without these types of "lock-in" tactics (not that it's not common).

the interface is nice and great to see the ability to work offline.

this is basically an updated Outlook Express, isn't it?

[kayvaan]

oops - last comment was meant for the Windows Live updates post

[ashkan karbasfrooshan]

Thanks Marc, just to clarify, as I did to your comment on my blog, re:

"Also, I think your financial analysis is a bit off. Buying WMG might bring $500 million in revenue to Apple, but not $500 million in profit. The new revenue brings cost with it."

We're talking about digital content, which like software is all profit once volume rises. So while $500M in revenue is not 100% profit, in terms of digital content, it is pretty darn close as volume picks up.

[Asian School]

Hey, you have a great blog here! definitely going to bookmark you!

I have a Stumbleupon site/blog. It pretty much covers StumbleUpon related stuff.

Come and check it out if you get time :-)