Mock acquisition analysis

1. XYZ Company [Redacted]
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2. XYZ company has an opportunity to acquire eRadio, a publicly owned internet radio company.
eRadio has several free, pre-programmed stations that are accessible through eRadio’s website.
 eRadio currently has 1 million active listeners streaming 5 million hours per month
 Each listener currently streams an average of 65 songs and 30 in-stream ads per month
 Current running at an estimated EBITDA loss of $231K/mo. from gross revenues of $300K (at $10 CPM)
Initial findings suggest an acquisition premium of 30% in order to successfully acquire eRadio:
 Based on the current market cap, XYZ will likely have to submit a bid of $19.5M (5.42x Revenue)
 Comparable to a similar transaction in 2009 (Myspace acquisition of iLike at $20 per listener)
eRadio’s technology combined with XYZ’s worldwide presence and resources could position eRadio as the
global destination for online radio. Nevertheless, this would extend beyond XYZ’s core competencies and
efforts to scale and monetize the business may prove significantly challenging.
Upon preliminary review, we recommend passing on this opportunity to explore alternatives with greater
potential upside.
Executive Overview
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3. OPERATIONAL HIGHLIGHTS
 1 million Unique Users (and Active Listeners)
 Approx. 5 million hours streamed per month
 50% sell-thru of available in-stream inventory
 25 full time employees
 Largest operating cost driver is labor ($2.5M/year)
Company Statistics and Comparables
FINANCIAL HIGHLIGHTS
 Current month forecast indicates Revenues of $300K
 Current month forecast indicates EBITDA loss of $231K
 Current ARPU/ACPU of $0.30/$0.53 per user
 Fees and royalties drive 62% of total costs
 Current market cap of $15M (4.17x Revenue)
 Must stream over 9x the current total number of hours in
order to break even
Unique Users 1.0M 2.9M 10.0M 40.0M 48.0M 60.0M
Listeners /
Subscribers
1.0M 750K 1.0M 4.9M 12.0M 895K
Streams 5M hours/mo. N/A 20M hours/mo. N/A 139M hours/mo. N/A
Employees 25 150 62 70 250 28
Monetization
In-stream
advertising
Freemium, ad
supported, Mobile
Freemium,
ad supported,
e-commerce
ad supported,
e-commerce
Freemium, ad
supported, Mobile
ad supported,
e-commerce
Founded N/A December 2001 December 2009 January 2002 January 2000 January 2002
Valuation /
Funding
$15M Market Cap N/A €83.2M in funding
Acquired = $280M
(CBS Int. - 2007)
$56.3M in funding
Acquired = $20M
(Myspace – 2009)
Sources: Comscore, Compete, Crunchbase, Wikipedia
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4. Strategic Benefits to XYZ
4
Positioning
Dovetails nicely with XYZ brand and can be utilized as a XYZ “radio” offering.
Acquisition would increase XYZ brand exposure as its consumer storefront.
Scalability
XYZ has the resources to implement eRadio’s internet radio services across
multiple platforms (television, auto, mobile, etc.)
Relevance Would enable XYZ to keep a tangible pulse on the growing, evolving industry
Synergies Immediate synergies (reduced hosting, consolidated headcount) can be realized
Resources
Acquisition would enable us to secure industry talent and stay ahead of
technology trends and insights
Reach Leverage global presence and industry relationships to enhance speed to market
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5. Potential Risks to XYZ
5
Financial
Full acquisition would require a financial outlay of $20M. eRadio is currently
cash negative and this acquisition may never see a return on investment.
Dependencies
Competing record companies can exhibit downward pressure and limit XYZ’s
efforts to monetize and scale the business both domestically and abroad.
Integration
Post-acquisition integration may be unfeasible and time consuming to daily
operations. Substantial resources required in order to mitigate challenges.
Unlawful and/or
Excess Activity
Music consumption must be moderated. Potentially expensive controls will be
required in order to mitigate bandwidth/streaming/site security costs.
Market
Saturation
Audience is fickle and incumbents (both well-capitalized and/or well-positioned)
dominate the market. A clear, differentiated value proposition is required.
Focus
eRadio offering to consumers would extend XYZ beyond its core competencies.
XYZ could face attrition to younger, more nimble startups
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6. Path to Profitability
REVENUE
Revenue - In-stream Advertising $ 300,000
TOTAL REVENUE $ 300,000
ARPU $ 0.30
COST OF REVENUE
Agency Fees $ 45,000
Ad Sales Commissions $ 90,000
Royalties - Recording Artists $ 45,500
Royalties - Songwriters $ 6,023
TOTAL COST OF REVENUE $ 186,523
OPERATING EXPENSES
Bandwidth costs $ 86,000
Compensation $ 208,333
Rent costs $ 25,000
Marketing costs $ 16,667
Other costs $ 8,333
TOTAL OPERATING EXPENSES $ 344,333
ACPU $ 0.53
EBITDA
EBITDA GAIN/(LOSS) $ (230,856)
Optimize new and existing revenue streams
 Explore freemium model, incorporating display advertising and e-commerce
 Increase existing sell-thru rate (currently at 50%) and available inventory
Realize operational efficiencies and other economies of scale
 Bringing operations in-house will negate the cost of additional rent
($25K monthly savings)
 Eliminating redundancy by reducing workforce from 25 to 12 employees will
result in a savings of $108K/month
 Consider taking ad sales in-house and/or renegotiating existing terms for
more favorable pricing
Invest opportunistically
 Additional $100K in marketing spend projected to increase music
consumption and increase gross sales to $600K/month, for a net gain of
$19K/month (5 month ROI assuming no user attrition)
6
P&L Summary – Current Month
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7. Successful internet radio companies historically have a combination of:
 Seasoned management teams: Rdio (Kazaa), Slacker (MusicMatch, Rio)
 Early and massive user adoption
 Differentiated products with compelling value propositions: Rdio (Cross-platform capabilities),
Last.fm (“Scrobbling”), Pandora (“Genome” matching)
At first glance, eRadio does not possess these winning elements. Notwithstanding our
recommendations to improve the bottom line, this business is encumbered with high cost margins
and remains cash negative. Therefore, our recommendation is to:
PASS
Given these conditions and the limited amount of information available, we
would recommend passing on this opportunity to explore alternatives with
greater potential upside.
Alternative, more feasible considerations:
Full Acquisition
Non-binding offer of $15M + $5M performance-based earn out. Proceed with
due diligence and revised LOI (with discovery window opt-out clause and
contingencies in escrow).
Partial
Acquisition
Acquire minority stake or enter into joint partnership to mitigate risk and
financial outlay
Recommendation to Management
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