TMT Valuations 
Trends, drivers and metrics in the TMT industry 
Alessandro Masi 
8/2/2011
TMT Valuations 2 
EXECUTIVE SUMMARY 
What is the nexus that connects technology, media, and telecommunication industries a...
TMT trends 
Convergence trends are accelerating in the TMT 
industries. Several factors are driving the convergence of 
th...
TMT Valuations 4 
Source: Bloomberg. 
Nevertheless, the M&A valuation multiples in the last two 
years period are much low...
TMT Valuations 5 
has been CA Technologies with 6 acquisitions in 14 
months totaling $1bn, whereas Oracle’s acquisition o...
TMT Valuations 6 
reduction; focus on more diversified revenue mix, leading 
brands, and strong cash flows; development of...
TMT Valuations 7 
operational rather than financial performance, such as 
multiples calculated on the number of mobile tel...
TMT Valuations 8 
Ad agency holdings EV/EBITDA(x) 2000-10. Source: Bloomberg. 
The base case for advertising agency stocks...
TMT Valuations 9 
Cable and satellite EV/EBITDA(x) and EV/Subscriber($) 2005-11. 
Source: Bloomberg. 
Although cable and s...
TMT Valuations 10 
Source: Bloomberg. 
As the economy improves and advertising rebounds, 
media investors are optimistic a...
TMT Valuations 11 
Source: Bloomberg. 
North American telecom services stocks outperformed the 
S&P 500 in 2010, based on ...
TMT Valuations 12 
Mobile&wireless, carrier and enterprise, and home consumer 
EV/Sales(x). Source: Bloomberg. 
Communicat...
TMT Valuations 13 
Source: Bloomberg. 
Driven by the rebound in corporate spending, most 
network storage stocks outperfor...
TMT Valuations 14 
US mobile ad spending ($mln), 2004-2009. Source: Bloomberg. 
Since 2005, global Internet ad spending ha...
TMT Valuations 15 
FCF growth ($M) and P/FCF (x), 2007-2010. Source: Bloomberg. 
Equity capital raised in the Internet sec...
TMT Valuations 16 
publicity effect, underwriters usually try to price the IPOs 
to rise about 15 percent on their first d...
TMT Valuations 17 
value / $29bn 2010 revenue = 6.3x trailing revenue 
multiple this indicates people are willing to pay ~...
TMT Valuations 18 
APPENDIX 
Sales pitch: hot TMT picks 
Utilizing the Credit Suisse HOLT® platform data, gently 
provided...
TMT Valuations 19 
35.0 
30.0 
25.0 
20.0 
15.0 
10.0 
5.0 
0.0 
Internet Media 
JCOM 
LOGM 
0.0 20.0 40.0 60.0 80.0 
EV/I...
TMT Valuations 20 
EXHIBIT 1: Internet Media valuations 
Name Mkt 
Cap 
Google Inc 194.66B 159.74B 17.01 14.33 0.91 0.77 4...
TMT Valuations 21 
RESOURCES 
· Alston & Bird LLP. "Board Focus on M&A: A Closer Look at Technology, Media and Telecom." 2...
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TMT Valuations - Report

  1. 1. TMT Valuations Trends, drivers and metrics in the TMT industry Alessandro Masi 8/2/2011
  2. 2. TMT Valuations 2 EXECUTIVE SUMMARY What is the nexus that connects technology, media, and telecommunication industries and motivates major investment banks to cluster those industries in the so called TMT groups? The main hypothesis is that those industries strongly rely on positive externalities: technologies that have always driven the sector will continue to affect their activity, especially as globalization and technology blur boundaries between industries. Hence, companies look for synergies through an intense M&A activity. TMT companies represent attractive investments because of (particularly in the early stages) very high ROI and huge growth potentials, therefore the market generally has a positive attitude towards their IPOs, even when they show poor (or negative) free cash flows. As a result, the TMT group of major investment banks is often a very profitable one. Focusing on valuations, this paper aims to define the main economics and trends of the TMT sector. It will analyze the new wave of Internet IPOs, the new frontiers of TMT and the role of i-bankers in them, and finally will attempt to pick hot stocks for the next future. TABLE OF CONTENTS TMT trends Page 3 Cloud, mobile and social networks Page 4 TMT valuations Page 6 The new wave of Internet IPOs Page 15 APPENDIX – Sales pitch: hot TMT picks Page 18 EXHIBIT 1 Page 20 EXHIBIT 2 Page 20 RESOURCES Page 21 Hult International Business School Boston, 8/2/2011 © Alessandro Masi
  3. 3. TMT trends Convergence trends are accelerating in the TMT industries. Several factors are driving the convergence of the TMT industry, most notably digitization, connectivity, and innovation. TMT convergence is occurring at three levels: 1) product and services to meet real customer needs, 2) platform convergence involves consolidation around a small number of standards (e.g. the IP as a universal standard for digital communication), 3) organizational convergence involves different companies’ people and IT systems working together to deliver a convergent product or service. The opposite reaction is intensifying risk as TMT companies increasingly foray into untested markets, uncertain alliances, and unfamiliar products. As identified by Deloitte in a recent report, “the net effect of convergence is that TMT companies are becoming more and more intertwined in a tangle of content, technology development, and distribution partnerships”. As these business models converge, TMT companies increasingly share responsibility for managing performance and risk, such as complex business models and intellectual property management, operating outside core competencies and risk of cascade failure, regulatory risk, retention of talent, vulnerability of digital products and services and digital rights management. (Deloitte 2008) The report also highlights that “increased confidence and activity by the large trade players in the global technology market will change the deal dynamics with several factors aligning to create a window of opportunity for increased M&A activity in 2011, such as more high quality assets being brought to the market as sellers seek to take advantage of the presence of cash-rich corporates with a renewed appetite for mega deals, while aggressive private equity buyers are returning, and improving capital markets provide a supportive influence”. (Deloitte 2011) The average value of deals per month (for the three months ended May 31) reached almost $60 billion, with a peak of 620 deals in the month of May. Global TMT M&A activity. Source: Bloomberg. The value of deals was boosted by the $8.5 billion acquisition of internet phone services Skype by Microsoft. Social media has also been in the spotlight in May, with the acquisition of London-based Tweetdeck by Twitter for £40 million. (M&A Deals 2011) The high levels of M&A activity in the sector indicate that it is on the up, and most companies have sound financial basis, and big cash balances: the result is that these companies are now seeing opportunities for new ideas and concepts coming out from exciting new ventures. The increased M&A activity has been accompanied by a rise in PE and Price/Sales ratios. According to Deloitte, technology stocks outperformed the FTSE 100 and NASDAQ Composite indices on the public markets in 2010: FinTech companies rose by 24%, while Cloud companies saw a rise of 20%, and SaaS (Software-as-a-Service) companies were the stock market stars in 2010 delivering a rise of 78%. (Deloitte 2011) In addition, both the Nasdaq-100 Tech Index and the MSCI USA/Tech Index outperformed the S&P500 Index by, respectively, 22.94% and 14.02% in the last three years period.
  4. 4. TMT Valuations 4 Source: Bloomberg. Nevertheless, the M&A valuation multiples in the last two years period are much lower than in the dot-com bubble period 1999-2000, therefore it is possible to assume that, despite an upward trend in the M&A activity, today TMT companies are more attractive targets for acquisitions. TMT M&A 1999-2000 and 2009-2010 valuation multiples. Source: Bloomberg. In particular, for Internet companies the average annual premium (19.07% in 2011) is substantially stable from 2007 but following a downward trend. Average premium Internet M&A 1999-2011. Source: Bloomberg. Cloud, mobile and social networks Cloud computing, mobile, and social networks are without any doubt the main drivers reshaping the TMT Industry at the moment, and developments in those sectors will drive valuations of the all industry. Cloud technologies are transforming the way computing power is bought, sold and delivered. Rather than purchasing licenses or hardware, users may now obtain computing power as a service, buying only as much as they need, and only when they need it. This new business model brings vast efficiency and cost advantages to government agencies, individuals, and companies of all sizes. The numerous benefits of cloud computing have already won over many adopters and are generating significant cost savings, efficiencies, flexibility, innovation, and new market opportunities. The Cloud does not yet have a dominant player, but all the larger technology players are aggressively battling for position and have been active in broadening their product offerings to build a full range of Cloud services. In many instances this has meant building scale and capabilities through acquisitions. According to a recent report by PWC, the major M&A activity to date has focused on infrastructure and virtualization technologies which underpin the Cloud’s development. The most active acquirer in 2010 Hult International Business School Boston, 8/2/2011 © Alessandro Masi
  5. 5. TMT Valuations 5 has been CA Technologies with 6 acquisitions in 14 months totaling $1bn, whereas Oracle’s acquisition of Sun Microsystems was also driven by a Cloud rationale as “Oracle plans to engineer and deliver an integrated system where all pieces fit and work together so customers do not have to do it themselves.” (Sun Microsystems press release). Deal multiples in the Cloud space are high: according to analysts’ reports Dell’s offer for Compellent values the company at almost 50x forecast EBITDA, while HP offered multiples of 8x sales for 3PAR. In addition to infrastructure and data storage and management, data security is also expected to be a strong growth area in the next M&A activity. To be mentioned that security is one factor behind the expected dominance of the Cloud market by large players, as corporates are more likely to entrust the security of their data to a large established player. Finally, the Cloud demands a different business model with a move from license sales and maintenance revenue approach to a usage basis, opening this up the market to innovative new players that can grow rapidly. (PWC 2011) Mobile is emerging as a high-growth platform for media companies, thanks to the rapid penetration of smartphone devices and growth of applications. According to Deloitte, in 2011 more than 50 percent of computing devices sold globally (825 million units) will not be PCs, but smartphones (375 millions) and tablets (50 millions). The result is “a shift from a world of mostly standardized PC-like devices, containing standardized chips and software, to a far more heterogeneous environment, with at least two substantially different chips architecture and at least 5 different operating systems that each have more than five percent market share.” (PWC 2011) Being the dominant operating system provider for the non-PC market will be a tremendous prize. The content experience here is focused on applications rather than Web pages, hence growth in media usage is likely to be monetized primarily by local search, location-based services, social media, targeted forms of promotional marketing, and paid entertainment services such as sports and games. The mobile Internet experience is evolving rapidly away from Web pages to downloadable applications, and it eventually may migrate again to cloud-based services. As the battle intensifies between Apple iPhone and Google Android in terms of devices and apps, media companies need to position themselves in terms of mobile-focused organic investment, partnerships, and acquisitions. (Alston & Bird LLP 2009) As regards to the rapid expansion of online video, limited innovation has happened in offering analog content for the Web, and media companies do not control (exception done for Hulu) the customer interface in digital, rather other play this key role (Apple, Google, Amazon). Media companies need to improve the customer experience and provide consumers with a more enhanced digital experience that they cannot get in analog media, particularly for tablet devices, and understand how to develop attractive applications, how to create a user interface that consumers find compelling, and how their brands can best be positioned in an interactive environment. Nevertheless, the volume of data uploaded or downloaded from portable devices will grow at a much faster rate (25-50%) than the volume carried over cellular broadband networks, thus Wi-Fi’s increasing share of the mobile device data load will likely have a ripple effect by slowing the growth rate of cellular broadband traffic, potentially helping improve margins for mobile providers’ data services. (PWC 2011) Focusing on media consumption, Deloitte predicts that “in 2011 television will solidify its status as the current super media, (…) revenues from pay TV in the BRIC countries will rise by 20 percent, worldwide TV advertising will increase by $10 billion (…)”. A recent report by Booz & Company highlights the emerging strategies of media and entertainment companies: continued vigilance on cost Hult International Business School Boston, 8/2/2011 © Alessandro Masi
  6. 6. TMT Valuations 6 reduction; focus on more diversified revenue mix, leading brands, and strong cash flows; development of digital business models with targeted, loyalty-focused, high quality content offerings supported by both advertising and subscription or transaction revenue streams; ongoing consolidation and portfolio realignment through M&A with a prominent role of private equity, anchored on branded content, technology, advertising/marketing services, digital businesses, and coherent capabilities; evolvement of the media-as-a-service model for advertisers, particularly for digital media, with media sales and marketing teams going beyond basic advertising placement to drive breakout growth; increased importance of analytic approaches to content decision making; important role of social media outlets as distribution hubs and monetization vehicle for content, given consumers’ propensity to share content, links, and networks. (Booz & Co. 2010) Social networks in 2011 are “likely to surpass the breathtaking milestone of one billion unique members. Also, they may deliver over 2 trillion advertisements. Yet the advertising revenues directly attributable to social networks may remain relatively modest compared to other media, at least in the short term. With per member annual advertising revenue of about $4, that implies total 2011 advertising revenues of about $4 billion.” (PWC 2011) Such figures represent only one percent of total worldwide advertising spend, but other sources of revenues such as payments systems and e-commerce might exhibit faster growth. Total industry revenues of $5 billion and a year-over-year growth of 30 percent are impressive numbers, but revenue on a per-subscriber basis is unlikely to match search or traditional media in the next year or two. Also, advertising rates, measured on a cost per thousand impressions (CPM) basis, are likely to remain low compared to other forms of online advertising as well as traditional media. Nevertheless, a social network’s cost of content is close to zero since it merely provide infrastructure, while its users and third party app developers provide the content. (PWC 2011) Since social networks’ potential is measured by subscriber growth, time spent on the network, and CPMs, the question relies in how much additional growth they can gain. The billion unique us03042ers milestone – half of global computer-based Internet users – could put a ceiling to the expansion of social networks, but mobile might offer a better opportunity, especially in developing countries where mobile penetration continues to rise steadily. The next challenge is the delivering of mobile ads at volumes and prices sufficient to create a multi-billion dollar business. In addition to the increased value of mobile ads, growth will come from increased time spent on the network, and from improved CPM metrics, currently among the lowest of all the forms of online advertising. Social networks value has been already partially recognized by the market, but there are still questions whether they can sustain their growth and find better ways to monetize their value. Social networks have to find better ways to exploit the gigantic amount of information they contain being aware of privacy regulations, and enlarge non-advertising revenues, such as the ones coming from e-commerce and subscriptions for premium content, for instance. TMT valuations The valuation of TMT companies has undergone profound changes over the last few years, especially after the speculative bubble linked to new technologies, to the propagation of mobile telephony and to Internet, when the definition of existing companies and the new competitors with a different economic-financial profile required new valuation techniques. The DCF model has traditionally constituted the theoretical foundation to determine the economic value of TMT companies, however during the new economy expansion alternative criteria based on Hult International Business School Boston, 8/2/2011 © Alessandro Masi
  7. 7. TMT Valuations 7 operational rather than financial performance, such as multiples calculated on the number of mobile telephony customers, on unique users for websites, on miles of fiber optics installed and on other proxies, became points of reference in the portfolio choices of TMT investors. (Global Startup Blog 2011) Many high-tech companies that obtained financing through venture capital, private equity and debt markets at extremely high valuation levels, justifiable only by the application of non-traditional methods, have not been able to sustain that value on the public market. As a result, multiples based on proxies and revenues are now considered to be not very significant and DCF valuation is often just used as a means of checking. There has been advancement in valuation techniques, which today support multiples like EV/EBITDA with increasingly complex estimates and calculations, often with a superior information value, such as multiples of free cash flow for the company (Operating FCF) and free cash flow for stakeholders (Equity FCF). (Borsa Italiana 2009) TMT valuations should be examined looking at the industry structure and to drivers and metrics for each of the sectors. Having highlighted cloud computing, mobile, and social media as main drivers of the TMT industry, making extensive use of the information provided by the Bloomberg platform, the following analysis focuses on the media industry and on the communication Integrated Circuits (ICs) and computer storage sectors. Advertising & Marketing. Advertising is a $403 billion global industry, with the agency business accounting for about $70 billion. Ad holding companies typically own a variety of agencies as well as marketing businesses such as public relations, customer relationship management, digital and market research. Six large holding companies dominate the industry and generate more than two-thirds of global revenue. Global revenue grew at a 7.1% CAGR from 2001-10, while U.S. revenue ($30 billion in 2010) expanded by 3.6%. Advertising agency holding companies' prospects are largely tied to macro-economic conditions. The growth of online advertising and the development of emerging markets represent two themes that will influence long-term growth. As the agencies pursue these two dynamic opportunities, they must invest wisely to ensure competitive returns. Media investors have become accustomed to aggressive returns of cash, which raises the bar on capital investment options. Television is the dominant platform, accounting for a third of advertising spending. Traditional mass media platforms such as newspapers, magazines and radio have been in a secular decline over the past 10 years, accelerated by the recession's impact on advertising from 2008-10. Digital advertising has been the fastest-growing platform and now accounts for 16% of global ad spending. The key metric for advertising companies is organic growth. From 2000-10, the industry's organic growth averaged 3%. In 2010, agencies posted organic growth of 6.5%, a steep improvement from a decline of 8.5% in 2009, as advertising responded to the economic recovery. Organic growth has been the fastest in the emerging Asian and Latin American markets. During the past decade, operating margins have averaged 10%, as costs are mainly variable and dominated by salaries. Advertising agencies are typically valued using P/E multiples, along with EV/EBITDA and EV/sales. The seven largest global agency networks are trading at about 15x forward 12-month EPS and 7.5x next year's expected EBITDA, below their five-year historical averages of 18x and 8.5x, respectively. The modest discount to historical levels reflects recent concerns about slowing economic growth and political instability in some emerging markets. Hult International Business School Boston, 8/2/2011 © Alessandro Masi
  8. 8. TMT Valuations 8 Ad agency holdings EV/EBITDA(x) 2000-10. Source: Bloomberg. The base case for advertising agency stocks reflects the steady yet uncertain global economic recovery. Advertising and marketing budgets have rebounded from the post-financial crisis lows of 2009 and U.S. ad spending has been robust during the recovery. However, tepid macro-economic trends have given investors reasons to be cautious. Emerging markets and digital advertising are the key long-term revenue growth drivers. Agencies must manage costs and increase margins during this recovery cycle. Cable & Satellite. The $180 billion pay-TV industry is well consolidated in subscribers and revenue. Cable multiple system operators (MSOs) such as Comcast and Time Warner Cable have the largest share, at about 62%. The two satellite providers, DirecTV and Dish Network, account for 33%, while telephone companies Verizon and AT&T make up the remaining 5%. Cable and telephone providers have a competitive advantage with their triple-play offering of video, Internet and phone services, while satellite has only video. The pay-TV business has become increasingly competitive, with cable operator monopolies threatened by satellite and telephone providers. Pay-TV companies have responded by including high- speed Internet data and telephone service to their core video product. Internet video (Netflix, YouTube) has emerged as the greatest threat to pay-TV. Cable operators and their programming partners have responded with initiatives such as “TV Everywhere” that give subscribers access to video on any device at any time. The pay-TV industry has grown three times faster than the U.S. economy in recent years. The domestic pay-TV industry is a $170 billion business and is now large, well penetrated and fairly mature. Investors have benefited from limited cyclicality in the cable and satellite business, especially over the past two years. Since 2004, cable revenue has grown at a CAGR of 10% while satellite has increased at a 12.5% CAGR. Advertising typically accounts for less than 5% of an operator’s revenue. The key revenue metrics for pay-TV providers are subscribers and average revenue per user (ARPU). The growth in each category has historically provided the best measures of future earnings. While video ARPU has been increasing because of new products and services such as high-definition TV and digital video recorder functionality, gross margins have been hurt by double-digit increases in programming expenses. Pay-TV subscriber growth has slowed as the market has matured and competition has increased. The primary metrics used for valuing companies in the cable and satellite TV industry are multiples of EBITDA and free cash flow. Cable and satellite stocks are trading at about 5x to 7x current year EBITDA, which is at the low end of the group’s historical trading range. The companies have become prodigious generators of free cash flow currently trade at 7x to 12x that measure. Pay- TV companies have begun to aggressively return cash to shareholders through dividends and stock buybacks. Hult International Business School Boston, 8/2/2011 © Alessandro Masi
  9. 9. TMT Valuations 9 Cable and satellite EV/EBITDA(x) and EV/Subscriber($) 2005-11. Source: Bloomberg. Although cable and satellite stocks have outperformed the market and overall media industry the past two years, investors are concerned about existing competition (cable vs. satellite vs. telephone providers) and potential competition (the Internet). While the pay-TV model remains robust, challenges to top-line growth and existing cost structures such as programming provide fodder for bulls and bears. Regulatory risk has returned as the Federal Communications Commission considers tightening oversight on high-speed Internet access. Diversified Entertainment. The media industry is dominated by several large companies with interests in networks, filmed entertainment and other leisure businesses. The TV networks, including broadcast and cable, are well consolidated, with the top incumbents representing 80% of the industry’s revenue. Filmed entertainment (movies and TV programming) constitutes 17% to 42% of total revenue for the diversified media conglomerates. The major film studios have maintained at least 10% market share in the past few years. Cable networks’ twin streams of advertising and affiliate revenue have driven the top-line success in recent years. Broadcasters are now starting to demand their own version of affiliate revenue from the program distributors to offset a cyclical decline in advertising. The emergence of digital media platforms such as Netflix and Hulu has highlighted media’s changing economic landscape. One of the greatest challenges facing media companies is how to optimize the value of their digital content. The key drivers for TV networks are advertising and affiliate fees. While advertising is cyclical, cable networks have exhibited the best growth profile of all advertising-driven media due to growing subscriber bases and a secular shift of audience and ad budgets from broadcast networks to cable. The filmed entertainment business is driven primarily by theatrical film sales and television production. The global theme park industry generated annual revenue of $25.4 bn in 2010. Broadcast networks have historically depended on advertising, while cable networks have also generated revenue from affiliates through distribution fees paid by cable, satellite and telephone providers. To ease the impact on revenue from the broader economy, broadcast networks are now demanding their own version of affiliate revenue in the form of re-transmission fees. Studio revenue from filmed entertainment (film and TV production) is about $100 billion a year, with operating margins of 10% to 15%. The primary metrics for valuing large media stocks are P/E, EV/EBITDA and P/FCF. The large companies are currently trading at about 18x trailing 12-month EPS and 9.0x trailing EBITDA, which are in line with their four-year historical averages. The current valuation likely reflects the positive outlook for ad spending, offset by the longer-term threat to “traditional” media posed by the Internet. On a trailing P/FCF basis, the large, media stocks are trading at 16x, which is in line with their four-year average, but a discount to their 15-25% FCF growth. Most large media companies generate significant free cash flow (margin about 12% and yield 7-8%). Hult International Business School Boston, 8/2/2011 © Alessandro Masi
  10. 10. TMT Valuations 10 Source: Bloomberg. As the economy improves and advertising rebounds, media investors are optimistic about near-term trends. The key issue is how and to what extent content creators can generate revenue and profit from their products in a digital world. Most investors appear confident that there will be demand for quality proprietary content no matter how it is distributed across the growing number of platforms in the global market. The concern is that the media industry repeats the mistakes of the music industry. Telecom Carriers. Following years of M&A, the North American telecom industry is largely a duopoly, with AT&T and Verizon generating 62% of 2009 industry revenue. The industry, which grew at a CAGR of 2% between 2005 and 2009, has two main segments including wireless (56% of revenue) and wireline (44% of revenue). Wireline revenue is in secular decline, having contracted at a CAGR of -4% between 2005 and 2009. In contrast, wireless generates all of the industry’s growth, posting a +8% CAGR over this same period. The telecom industry is in transition, with wireless growth slowing and wireline revenue in secular decline. In the wireless sector, net adds are contracting, as market saturation leaves little room for future subscriber growth. In response, carriers have launched new data services aimed at boosting ARPU. In wireline, access lines are in secular decline, prompting carriers to launch new data and video services. These services are not yet large enough to offset the access-line revenue decline. GDP is the primary driver of growth in the telecom industry. Each of the industry segments has distinct drivers, but all are influenced by GDP. The secular decline in the fixed line business has been driven by wireless substitution and competition from cable MSOs as well as weakness in new home sales and high unemployment. In contrast, wireless revenue has grown over the past few years, driven by growth in smartphones, tablets and connected devices. As with any subscription business, a telecom carriers’ revenue model hinges on subscribers and rates. In order to gain insight into a carriers’ business and its outlook, it is important to monitor subscriber and segment revenue trends, access line erosion, growth in data revenue and average revenue per unit (ARPU) trends. Among these measures, the most important are growth in data ARPU and revenue trends, as data holds the key to future industry growth while voice revenue structurally declines. There are several approaches to valuing telecom stocks, including comparative analysis based on EV/EBITDA, P/E ratio or Price/FCF. Discounted free cash flow analysis and dividend discount models are broadly used methods. The most common approach is comparable valuation based on EV/EBITDA for 2011. The forward EV/EBITDA multiple is just above 6.0x and has been moving lower since year-end 2010. This compares with a long-term average of 6.4x. AT&T is trading at 5.5x, and Verizon at 5.6x. Both have risen year-to-date, despite a drop in the industry average. Hult International Business School Boston, 8/2/2011 © Alessandro Masi
  11. 11. TMT Valuations 11 Source: Bloomberg. North American telecom services stocks outperformed the S&P 500 in 2010, based on the belief that the U.S. economy would remain in recovery. This belief is supported by modest improvements in some of the more economically sensitive segments of the telecom business, including the fixed-line and enterprise segments. Expectations for a continued recovery are also evident in analyst consensus estimates, which call for industry revenue to rise approximately 3% in both 2011 and 2012. Communications ICs. The $42 billion communications integrated circuits industry is concentrated, with few competitors having the resources to shape the landscape. It has three categories: mobile & wireless ($31 billion; top five control 64%), enterprise & carrier ($7 billion) and wired consumer. Cellular integrated circuits, adjacent technologies and infrastructure ICs account for 80% of sales. Technology integration, chip size and power consumption are challenges amid falling prices and a short business cycle. 2011 should see growth in integrated circuits, driven by 3G expansion and ensuing smartphone sales in the BRIC region. With dramatic content increase, this opportunity bodes well for the large IC makers - especially Qualcomm. The degradation of smartphone IC ASP’s in integrated basebands and competition in application/graphics processors will determine the extent of sales growth. Infrastructure IC sales should benefit, albeit unevenly. The Japan crisis likely affects near-term component supply. Consumers drive cell phone units and complexity, leading to communications IC market growth. This market varies regionally by unit growth rate, device complexity, data consumption and pricing. Developed regions are closer to transitioning to 4G in 2011 while BRIC countries likely shift volumes to 3G. Overall IC ASP decline may moderate, as emerging market 3G networks and smartphones add to the total addressable market. Offsetting factors are large number effect, IC integration and ASP weakness. The integration of ICs, smartphone sales, 3G and the expansion of the LTE/4G network are key metrics for the communications semiconductor industry for the next two years. These factors are intertwined and the ensuing effect may be dramatic, particularly in the populous, economically improving BRIC nations. Large total addressable market expansion in integrated circuits comes from advanced phones, new networks and the integrated, complex and expensive ICs in those phones. Communications semiconductor valuations have compressed to a level similar to analog semiconductors. If the smartphone impact is higher than expected, communications integrated circuits might again become a cyclical growth industry rather than a commodity group facing a secular valuation decline. Enterprise networking, carrier infrastructure and mobile and wireless appear to be highly valued relative to the wired consumer group, reflecting the latter’s narrower margins and lower growth rate. Multiples based on sample companies from each group show that mobile and wireless IC firms along with infrastructure semiconductors trade higher than home consumer on EV/sales. Some companies are highly valued for their growth while others for their margin levels. Hult International Business School Boston, 8/2/2011 © Alessandro Masi
  12. 12. TMT Valuations 12 Mobile&wireless, carrier and enterprise, and home consumer EV/Sales(x). Source: Bloomberg. Communications IC makers face offsetting trends following a rebound post recession. Unit growth should help the phone IC industry, while declining ASPs hurt sales. The mix of smartphone sales and rate of 3G/4G infrastructure expansion, especially in BRIC, will determine whether Comm. IC sales grow faster than the last four years. Smartphone IC ASP is growing due to content expansion (Wifi, processors, graphics, memory), while feature phone IC ASPs are declining due to commoditization. Computer Storage. The $64 billion computer storage industry is divided into PC storage (52%), network storage (46%) and storage fabric (interconnect adapters). Consolidation has concentrated the industry ― Seagate and Western Digital control 90% of the PC-heavy hard disk market, while EMC, IBM, HP, NetApp and Dell hold 80% of enterprise-heavy network storage. Increased corporate IT spending, cloud computing and unstructured data growth (big data) continue to drive enterprise storage. Hard drive vendors face weaker PC demand. Digital data grew by a record 62%, to 800 million terabytes in 2009 and is expected to reach 10 trillion terabytes by 2015, according to IDC. Storage technology is evolving to support this growth in the wake of unstructured data (big data), real-time analytics and cloud transitions. Adoption of solid-state drives, virtualized unified storage and cloud storage, along with the need to efficiently manage large data growth, could result in total addressable market expansion for key vendors. Network storage systems have had a high correlation with corporate capital spending and server shipments. The key near-term drivers of the storage industry are a continued increase in corporate IT spending, technology transition to virtualized environments and big data growth. Storage fabric vendors are affected by their high OEM dependence, while hard disk drive vendors are highly sensitive to PC unit shipments. The storage industry has registered a five-year revenue CAGR of just 3% even as capacity shipped increased five-fold. Steep declines in average selling prices, driven by demand for systems costing less than $50,000, likely limit near-term revenue growth. Share gains and margin improvement through software and service offerings packaged with hardware appear to have the potential to expand EPS. Big data and real-time analytics continue to offer longer-term opportunities to expand the market. The storage industry is becoming non-cyclical due to rapidly increasing data growth. Company valuations, though, have cyclically compressed during the last two years, taking storage vendors' multiples to relatively low historical levels. Storage stocks continue to be sensitive to market share in the near-term while big data/real-time analysis remains the longer-term growth driver. Cash-adjusted multiples are better valuation metrics because the companies tend to accumulate cash. With 20% of the market cap in cash, P/E excluding cash and related interest is a preferred metric to compare companies. With this measure, NetApp’s valuation is lower than EMC due to its rapid increase in cash-per-share over the last year. Both have higher multiples than the S&P 500 Technology Index. Hult International Business School Boston, 8/2/2011 © Alessandro Masi
  13. 13. TMT Valuations 13 Source: Bloomberg. Driven by the rebound in corporate spending, most network storage stocks outperformed the S&P 500 over the last year. Consensus expectations for 2011 are positive as virtualization continues to drive data center spending. That said, investors are more cautious on hard-disk drives due to weak PC consumer demand, as well as market share losses by storage fabric vendors. Internet Media. The Internet advertising industry is largely consolidated, with a small group of big U.S. companies ― including Google, Yahoo! and AOL ― controlling a majority of global revenue. Search and display are the two main types of Internet advertising. Global Internet ad revenue was $62 billion in 2010 and has grown at a 27% CAGR since 2005. U.S. Internet ad spending was $26 billion in 2010 and has grown at a CAGR of 16% since 2005. Google leads with 46% of global advertising and 52% of U.S. spending. Internet investors are searching for the next “new thing” that will drive Internet revenue higher as traditional search and display ad growth rates moderate. Social, mobile and local advertising have captured investors’ attention and have resulted in a vigorous private funding market and a growing IPO pipeline that reminds some of the late ‘90s. Social media companies such as Facebook, Twitter and LinkedIn lead the way with high-profile financings at impressive valuations. Internet penetration is about 27% globally, well below the 76% of the U.S. Penetration in China is only 29%. While advertising declined for most media in 2009, global online ad revenue increased 9% to $54 billion, and grew 14% to $62 billion in 2010. The primary components of global online advertising are search (50% of the market), display (34%) and classified (16%). Global ad revenue sources. Source: Bloomberg. Social networking and mobile represent meaningful new growth opportunities for ad publishers. Since 2006, ad spending in the US on social media has increased at a CAGR of 38% to more than $1.1bln. US ad spending 5-Yr CAGR social vs. total. Source: Bloomberg. Since 2005, US mobile ad spending has grown at a CAGR of 58%, well above the 16% growth rate of US Internet advertising. Mobile still represents only 5% of total US online advertising, but the diffusion of smartphones and tablets will sustain the growth of the mobile platform. Hult International Business School Boston, 8/2/2011 © Alessandro Masi
  14. 14. TMT Valuations 14 US mobile ad spending ($mln), 2004-2009. Source: Bloomberg. Since 2005, global Internet ad spending has grown at a CAGR of 30%, while the US was 16%. If Internet penetration continues to grow in developing markets, ad spending should follow. Global vs. US online ad spending ($mln), 2005-09. Source: Bloomberg. Internet advertising is generated from three platforms: search, display and classified. Search (4-yr CAGR: 36%) comprises about half of global Internet advertising, followed by display (CAGR: 26%). Internet media companies have had double-digit growth in revenue and adjusted earnings in recent years, with EBITDA margins in the 40% range. Costs are dominated by traffic acquisition costs. The group is well capitalized with little to no long-term debt and ample liquidity. The primary metrics used to value Internet stocks are P/E, EV/EBITDA and P/FCF (see Exhibit 1 for a breakdown of valuations in the sector). The four largest Internet advertising stocks are trading at about 19x forward 12- month EPS and 6x next year’s expected EBITDA, compared with their five-year historical averages of 25x and 11x, respectively. Google currently trades at 10x consensus 2011 EBITDA, which is the low end of its three-year range of 10x-22x. The discounted valuations are likely a result of the stocks transitioning from rapid growth in the early stages of advertising share shift to the Internet to a more steady state of revenue and earnings expansion. Internet stocks have historically been valued on future earning, due in part to their relatively high earnings growth. The large Internet advertising stocks currently trade at a modest premium to the group’s five-year historical average of 32x. Historical and forward P/E (x) – Internet Media, 2006-11. Source: Bloomberg. Internet stocks are also valued as multiples of free cash flow. Google’s FCF has exhibited an impressive 44% CAGR during the past four years. On a P/FCF basis, Google and Yahoo trade at 22x (low end of historical range) and 41x (mid-point of historical range), respectively. Hult International Business School Boston, 8/2/2011 © Alessandro Masi
  15. 15. TMT Valuations 15 FCF growth ($M) and P/FCF (x), 2007-2010. Source: Bloomberg. Equity capital raised in the Internet sector has accelerated as companies and their investors seek to capitalize on improving equity markets and the growth of social media and e-commerce: at least nine Internet companies have raised more than $2.7 billion at ever increasing valuations since 2010 (see Exhibit 2). The Base Case for Internet stocks reflects a positive view of both the short-term cyclical and long-term secular industry trends. Investors place a premium on the superior growth of search vs. display advertising-driven companies. Investors are focusing on areas of accelerating growth, such as social networking (Facebook) and online video (Netflix). Internet stalwarts such as Google and Yahoo! have underperformed the S&P 500 Index this year, even with signs of a cyclical advertising recovery. The new wave of Internet IPOs With the Internet IPOs pipeline building up, the question is whether the current interest in social media is dot.com hype or represents sustainable value creation. This time, however, valuations seem to be much focused on fundamentals (like cash flow generation) rather than on how cool is the website. A big difference between social media businesses and web 1.0 is the ability of social networks to benefit from network effects, which raise users’ switching costs and create greater (yet not insurmountable) barriers to entry than exist for transactional web-site businesses. (MediaTech Analyst 2011) To be mentioned that UBS has recently launched a new Internet IPO ETN (EIPO) that is linked to the UBS Internet IPO Index (exposed to Internet-related companies that have been publicly traded for less than three years). The underlying portfolio includes companies that have recently completed high profile IPOs, such as Pandora Media, OpenTable, and LinkedIN, with the result of a collection of stocks engaged in a wide variety of businesses with a focus on the Internet. Upcoming Internet companies that complete IPOs will be included in the index at a later stage. This shows the increasing attention of investment banks to Internet companies and to the related IPOs pipeline. (ETF Database 2011) If these companies continue to grow rapidly and throw off ever larger amounts of cash, then they could be easily be worth well north of what they are worth today. Each of the companies earning big valuations, either in the private and in the public market, have revenues in the hundreds of millions or more, and operating profits in the tens of millions or more, most also have operating histories of many years. In addition, the market has changed, and users are comfortable spending money using the Web, and such companies express solid business models that could represent the future of how business will be done. Newly public companies will prove their value in the long run by delivering growth, but they already have strong platforms of revenues and profits, and extraordinary market positions from which to start. (WSJ Blog 2011) Internet startups are difficult to price because of the lack of direct competitors to base an IPO valuation on, and the private market valuations are based on a handful of trades made by a small group of investors. Given the risk of underselling, the gains that can be made on first-day transactions if the price goes up, and also the positive Hult International Business School Boston, 8/2/2011 © Alessandro Masi
  16. 16. TMT Valuations 16 publicity effect, underwriters usually try to price the IPOs to rise about 15 percent on their first day of trade. So far this year, tech-related IPOs debuting in the United States have risen an average of 23.4 percent on their debut, according to data from Ipreo. (MSN Money 2011) LinkedIN. The professionals’ social network sold $352.8 million of stock in the IPO, making it the fifth biggest Internet software and services IPO since Google, which raised $1.67 billion pricing the shares at $45 for a valuation of $4.25 billion or 13x 2010 revenues and 90x EBITDA, but might have risen far more than that (shares more than doubled in the first day of trading, giving the company a valuation of $8.91 billion), considering also that the offering accounted for only the 8% of shares outstanding. (SEC Archives 2011) LinkedIn barely raised any money during its pre-IPO days, but in a 2008 fundraising round with Goldman Sachs, Bessemer and other investors, LinkedIn was valued at roughly $1 billion. Today LinkedIN stock is trading up $100, but JP Morgan, one of the leading underwriters, said that $85 is a fairer price as its current market value of $12 billion does not reflect the risk/reward balance of the stock (Netflix market value is $15 billion and the company will generate seven times the revenue and earnings of LinkedIN next year). Today its valuation is at over 233x EV/EBITDA or almost 20x compared to Google. (Berg E. 2007) LinkedIN has around 100 million users, financial performance is improving but even if it could keep up 186% growth rate in earnings in 2011, that would still only be a projected $10.43 mln in Net Income, giving a PE multiple of 800x. (Business Week 2011) The biggest question is the sustainability of such growth, given that the business model is based mainly on advertising, which however does not match with the “trustworthiness” referred as main strength. In addition, the hiring solutions and the social networking aspects have strong competitors such as Monster.com and, of course, Facebook and latest also Google+. On the other side, the upcoming Facebook IPO and the small float (10% of outstanding shares) should continue to move LinkedIN upward over the next year. Pandora. The other side of the coin is represented by the Internet radio Pandora, whose stock declined 13.38% after its initial offering price of $16 per share and $234.9mln raised, which valued the company at $2.56 billion or 20x 2010 revenues. (SEC Archives 2011) During the first day of transactions the stock was up only 8.9%. The company was and it is still unable to show any profit, nevertheless the offering ended up raising $235 million and sold 14.7 million initial public offering shares, almost double the amount originally aimed. So far, the company hasn’t been able to generate enough revenue from advertising (87% of revenues) to offset its royalty expenses, and it warns that it expects to continue generating operating losses at least through fiscal 2012, which ends in January. (Business Insider 2011) The company has high growth potential given the low marginal cost per user, hence it seems too early to say that the company is overvalued. But it may face competition from Apple, Amazon, Google, which are investing in their own online music offerings, and also from CBS Corp.’s Last.fm and Spotify Ltd. Facebook. The business is growing faster than the company had predicted: the company is on track to earn $2 billion EBITDA this year, a figure that is higher than the numbers presented to Goldman Sachs Group and Russian investor Digital Technologies when they invested $500 million at a $50 billion valuation. Rumors say that Facebook will be valued $100 million, but anyway 25x to 50x EBITDA for one of the premier Internet companies in the world is not crazy. (Seeking Alpha 2011) Facebook made $1.2 billion in the first 9 months of 2010 or $1.6 billion at an annualized rate, which would equate to a 31x trailing revenue multiple. Compared to Google's $185bn Hult International Business School Boston, 8/2/2011 © Alessandro Masi
  17. 17. TMT Valuations 17 value / $29bn 2010 revenue = 6.3x trailing revenue multiple this indicates people are willing to pay ~5x more for "$1 of Facebook revenue," presumably because of growth expectations. (Deloitte 2011) There is, potentially, a lot of additional value to be created in Facebook stock from driving traffic, audience, brand, attention, value. In addition, the social network intends to raise $1.5 billion through a special purpose vehicle (SPV) that Goldman Sachs would be setting up to allow some of its clients to indirectly invest on Facebook, and would allow to work around the SEC regulation that requires companies with 500 or more shareholders to disclose their earnings to the SEC. Groupon. The coupon company could seek to raise as much as $750mln at a valuation of about $20 billion, or 28x revenues in 2010, from a fund raising round in January 2011 at a valuation of less than $5 billion. The lead underwriter will be Morgan Stanley. (Reuters 2011) The company is growing at absurd rates ($30mln revenues in 2009, $713mln in 2010, $644mln in Q1 2011), has not generated any profit and it expects its “operating expenses will increase substantially in the foreseeable future as we continue to invest to increase our subscriber base, increase the number and variety of deals we offer each day, expand our marketing channels, expand our operations, hire additional employees and develop our technology platform.” But 2010 and in Q1 2011, Groupon generated free cash flow of $72.2 million and $7.0 million, respectively, even spending heavily to acquire new subscribers and merchants. (HBR Blog 2011) Growth potential is there and seems to be quite sustainable, even though some concerns can be raised as regards to its business model: there are relatively few switching costs for customers, the model is based on individual transactions, the user interface for Groupon offers no particular advantage, benefits of discounted prices and access to vendors are largely optional or discretionary, there is modest impact on customers experience. On the other side, there is a strong network externality effect, as its business relies on hundreds of representatives who sign up hundreds of retailers, and there are many and ongoing benefits that customers might derive. Groupon is very likely to face increasing competition at the local level and from big players such as Facebook, Google and Microsoft, each of which has launched initiatives which are directly competitive, therefore it requires not only organic growth, but also ongoing alliances and acquisitions in order to satisfy customer needs. Currently, it offers a 50-50 deals with businesses: one winning point might be to scale the business and be able to offer better deals that competitors are not able to imitate., thus attracting more and higher quality businesses and increasing customer loyalty. Zynga. The gaming developer is getting ready to turn public raising $1.5-2 billion at $15-20 billion valuation, or up to 46x EV/EBITDA. Comparable multiples: Activision has a 6x multiple, Electronic Arts came in at 11x, Take- Two and Ubisoft both had 8x multiples. Concerns can be raised on the dependence on the Facebook platform, so Zynga should gain a bigger presence on Apple’s products and in Android as well. (Battelle Media 2011) Other downturn is the dependency on strong brands such as Mafia Wars and Farmville, rather than on having a strong brand itself. Nevertheless, the growth potential of the gaming industry, particularly in the mobile markets and if related to social media, is huge: this attracts more competitors, but it also stimulates growth in revenues (from $121mln in 2009 to $597mln 2010, expected $1.5bln in 2011, earnings of $90.6 million last year and expected $500mln this year) and makes possible for the 148 million monthly unique users in 166 countries to grow further. Hult International Business School Boston, 8/2/2011 © Alessandro Masi
  18. 18. TMT Valuations 18 APPENDIX Sales pitch: hot TMT picks Utilizing the Credit Suisse HOLT® platform data, gently provided by the Institute of Equity Analysis and Strategy™, it is possible to compare current EV/IC'1 and expected ROI'2 and identify firms that are currently undervalued by the market, with the applied restrictions that assets and sales growth rates for FY2011, combined, have to be at least 5%, and ROI' has to be at least 5%. The model assumes that firms are correctly valued if: EV/IC'=ROI'/Cost of Capital, which for simplicity is assumed to be equal to 5% in real terms. These recommendations have the purpose to underline the fundamentals that will drive a change of Enterprise Value, but will not provide a target price as this would require further analysis. Media. Viacom, Inc. (NYSE: VIA.B) is a potential long, Charter Communications, Inc. (Nasdaq: CHTR) is a short. 1 EV is Enterprise Value, defined as Market Cap + Minority Interest + Book Debt; IC is Invested Capital, defined as Net Working Capital + Long Term Non Depreciating Operating Assets (including Land and Non Depreciating Operating Intangible Assets, excluding Goodwill and other acquisition related Intangible Assets) + Inflation Net PP&E + Net Capitalized R&D + Net Capitalized Leases + Net Depreciating Operating Intangible Assets. 2 Return is Net Operating Cash Flow (NOCF) calculated as Net Income + Special Items +Interest Expense + Depreciation and Amortization Expense + R&D Expense + Rental Expense + Minority Interest Expense + Pension Charges + LIFO to FIFO adjustments + Stock Option Expense + Purchase Accounting Cash Flow Adjustments – Non Operating (Investment) Income – Asset Life Based Charge on Depreciating Assets; Investment is Invested Capital, or Net Working Capital + Long-Term Non Depreciating Operating Assets (including Land and Non Depreciating Operating Intangible Assets, excluding Goodwill and other acquisition related Intangible Assets) + Inflation Net PP&E + Net Capitalized R&D + Net Capitalized Leases + Net Depreciating Operating Intangible Assets. 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Media VIA.B CHTR 0.0 10.0 20.0 30.0 40.0 50.0 EV/IC' FY1 ROI' VIA.B, media entertainment producer, should see its EV/IC' increasing by approximately 2 points leveraging on increasing ROI', growing EPS, and sufficient growth. CHTR, broadband Internet communications services provider, has modest market share, no prospective growth and is overpriced compared to its peers. Hardware. SanDisk Corp. (Nasdaq: SNDK), Synaptics, Inc. (Nasdaq: SYNA) and Harris Corporation (NYSE: HRS) are potential long. 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Hardware SNDK SYNA 0.0 10.0 20.0 30.0 40.0 EV/IC' FY1 ROI' SNDK, supplier of flash data storage products, is slightly underpriced, has a projected 5% growth and growing EPS. SYNA, developer of custom-designed user interface solution, should see its EV/IC' rise by 2 points due to a noticeable 12% assets and 17% sales growth. Internet Media. J2 Global Communication, Inc. (Nasdaq: JCOM) is a potential long, LogMeln, Inc. (Nasdaq: LOGM) is a short. Hult International Business School Boston, 8/2/2011 © Alessandro Masi
  19. 19. TMT Valuations 19 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 Internet Media JCOM LOGM 0.0 20.0 40.0 60.0 80.0 EV/IC' FY1 ROI' JCOM delivers cloud-based communication services at an extraordinary 66% ROI' which would imply a 4 points increase in EV/IC': the company has been beating earnings estimates and growing its revenues and profit for 5 consecutive years due to growing industry and international expansion. Semiconductors. Lam Research Corp. (Nasdaq: LRCX) and Microsemi Corp. (Nasdaq: MSCC) are potential long, CEVA, Inc. (Nasdaq: CEVA) is a short. 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Semiconductors MSCC LRCX CEVA 0.0 10.0 20.0 30.0 40.0 EV/IC' FY1 ROI' LRCX, manufacturer and marketer of semiconductor processing equipment, has been currently struggling due to lower than expected results to important customers in its supply chain such as Toshiba and Samsung, but is expected to grow assets by 27% and sales by 49% and ROI' by 10%, reverting the negative trend and rising its EV/IC' by 3 points. Software. Microsoft Corp. (Nasdaq: MSFT) and Intuit, Inc. (Nasdaq: INTU) are potential long, Qlik Technologies, Inc. (Nasdaq: QLIK) is a short. 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 Software MSFT QLIK INTU 0.0 10.0 20.0 30.0 40.0 50.0 60.0 EV/IC' FY1 ROI' MSFT trades at a discount compared to its peers: its ROI' levels would imply an increase by 2 points of its EV/IC', considering also 16% asset (both organic and through acquisitions) and 10% sales growth. Ongoing questions are if MSFT will be able to compete with new products, alliances, and acquisitions in the strategic Internet search and in the mobile markets. Telecom. Windstream Corp. (Nasdaq: WIN) is a potential long, CenturyLink, Inc. (NYSE: CTL) is a short. 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Telecom CTL WIN 0.0 5.0 10.0 15.0 EV/IC' FY1 ROI' WIN, telecommunications services provider to rural communities in the US, is currently the only underpriced stock in the telecom sector: however, its ROI' momentum is negative and its EPS is only slightly increasing. EV/IC' might go up by .5 if the company finds ways to increase its market share and improve its profitability. Hult International Business School Boston, 8/2/2011 © Alessandro Masi
  20. 20. TMT Valuations 20 EXHIBIT 1: Internet Media valuations Name Mkt Cap Google Inc 194.66B 159.74B 17.01 14.33 0.91 0.77 4.79 5.56 4.6 13 10.16 8.39 20.32 Baidu Inc/China 54.79B 342.52B 54.21 36.08 1.29 0.86 32.45 24.73 16.14 N.A. 42.64 28.16 N.A. Tencent Holdings Ltd 47.87B 292.48B 27.52 21.19 0.92 0.71 13.45 10.49 8.03 N.A. 19.87 15.37 N.A. Yahoo Japan Corp 20.71B 1.42T 16.09 N.A. 2.41 2.24 4.85 4.63 4.36 8.35 7.92 7.42 28.91 Yahoo! Inc 17.07B 14.69B 16.97 15.16 1.28 1.14 2.64 3.31 3.15 9.55 8.99 8.39 36.82 Yandex NV 11.24B 307.04B 60.57 41.33 2.02 1.38 19.57 16.33 11.43 45.87 36.27 24.44 N.A. LinkedIn Corp 9.67B 9.67B N.A. 331.25 N.A. 5.1 33.07 21.7 14.39 233.35 271.64 92.44 N.A. NHN Corp 9.59B 9.72T 18.4 15.3 N.A. N.A. 7.32 4.76 4.26 15.38 12.39 11.13 22.72 Sina Corp/China 6.68B 5.87B 94.57 55.2 5.76 3.36 14.06 12.36 9.7 62.37 69.17 44.88 N.A. IAC/InterActiv eCorp 3.77B 3.01B 21.88 18.03 0.81 0.67 1.66 1.54 1.38 13.9 8.69 7.13 11.36 Sohu.com Inc 3.45B 2.84B 17.55 14.87 0.91 0.77 4.31 3.6 2.93 10.15 9.09 7.42 19.22 Pandora Media Inc 2.41B 2.52B N.A. N.A. N.A. N.A. 15.1 9.9 6.25 N.A. 3.80k N.A. N.A. AOL Inc 1.84B 1.55B 14.99 15.3 N.A. N.A. 0.68 0.71 0.75 2.77 3.71 4.03 6.27 ValueClick Inc 1.42B 1.22B 16.58 14.71 1.18 1.05 2.7 2.35 2.1 9.83 7.87 6.96 13.47 Earthlink Inc 884.49 Source: Bloomberg. EV P/E FY1 P/E FY2 PEG Ratio FY1 PEG Ratio FY2 EV/TTM Revenue EV/Reve nue FY1 M 931.07 M 22.97 24 1.31 1.37 1.01 0.72 0.71 4.04 2.98 3.09 6.14 EXHIBIT 2: financing raised by Internet companies Name Valuation ($,billion) Valuation Date Market Revenue 2010 ($, billion) Revenue 2011E ($, billion) Global Unique Visitors (million) EV/Reve nue FY2 EV/Revenue 2010x EV/TTM EBITDA EV/Revenue 2011x EV/EBIT DA FY1 EV/User ($) P/FCF Comments EV/EBIT DA FY2 FACEBOOK INC 24 Jun-10 Private 2 3 551 12x 8x 44 $120mln funding Elevator Partners 50 Jan-11 Private 4.05 647 25x 12x 77 $500mln Goldman Sachs/Digital Sky Technologies investment 79 Feb-11 Public-SharesPost 4.05 693 40x 20x 114 GROUPON INC 1.35 Apr-10 Private 0.73 0.92 2x 1x $135mln Digital Sky Technologies investment 4.75 Dec-10 Private 0.73 2.579 50 7x 2x 95 $950mln series G funding 6 Dec-10 Private 0.73 2.579 50 8x 2x 120 Rumored buyout from Google 6 Feb-11 Public-SharesPost 0.73 2.579 70 8x 2x 86 20 Jun-11 Public 0.73 2.579 83 28x 8x 241 $750mln IPO filed LINKEDIN CORP - A 2 Jul-10 Private 0.243 0.486 65 8x 4x 31 $20mln round led by Tiger Global 2.9 Jan-11 Public-SharesPost 0.243 0.486 65 12x 6x 45 3 May-11 Public 0.243 0.486 65 12x 6x 46 $315mln IPO filed 4.25 May-11 Public 0.243 0.486 65 17x 9x 65 $352.8mln raised from IPO ZYNGA INC 4 Jul-10 Private 0.85 275 5x 15 $147mln Softbank investment 5.8 Jan-11 Public-SharesPost 0.6 1.2 10x 5x 8 Feb-11 Private 0.6 1.2 13x 7x $250mln funding from potential investors 8.2 May-11 Public-SharesPost 0.6 1.2 14x 7x 20 Jun-11 Public 0.6 1.2 33x 17x IPO filed PANDORA MEDIA INC 1.27 Feb-11 Public 0.138 0.27 9x 5x $109mln IPO filed 2.6 Jun-11 Public 0.138 0.27 19x 10x $235mln raised from IPO Latest transaction multiple IPO filed Source: Bloomberg. Hult International Business School Boston, 8/2/2011 © Alessandro Masi
  21. 21. TMT Valuations 21 RESOURCES · Alston & Bird LLP. "Board Focus on M&A: A Closer Look at Technology, Media and Telecom." 2009. · Battelle Media. 2011. http://www.battellemedia.com. · Berg E., Neumann R. "Searching for Google's Value." 2007. · Bloomberg. Proprietary Platform. 2011. · Booz & Co. "Media Industry Perspective ." 2010. · Borsa Italiana. "Valuation Guide." 2009. · Business Insider. 2011. http://www.businessinsider.com. · Business Week. 2011. http://www.businessweek.com. · Deloitte. "Technology, Media & Telecommunications Predictions." 2011. · Deloitte. "Urgent Convergence: Fostering Risk Intelligence in the Technology, Media & Telecommunications Industries." 2008. · ETF Database. 2011. http://etfdb.com. · Global Startup Blog. 2011. http://globalstartupblog.com. · HBR Blog. 2011. http://blogs.hbr.org. · M&A Deals. 2011. http://www.mandadeals.co.uk. · Mashable. 2011. http://mashable.com. · MediaTech Analyst. 2011. http://www.mediatechanalyst.com. · MSN Money. 2011. http://money.msn.com. · PWC. "Technology M&A Insights." 2011. · Reuters. 2011. http://www.reuters.com. · SEC Archives. 2011. http://www.sec.gov/Archives/edgar. · Seeking Alpha. 2011. http://seekingalpha.com. · WSJ Blog. 2011. http://blogs.wsj.com. Hult International Business School Boston, 8/2/2011 © Alessandro Masi

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