In the Content Website space, fix&flip strategies on an asset-per-asset basis are predominant. This approach is far from best practice, as you’re missing out on building a portfolio and thriving off the valuation arbitrage. Valuation arbitrage? Multiple expansion? That’s the very reason why you can acquire a Content Website for 2.5-4x while media companies like Red Ventures or Buzzfeed are trading at 15-20x EBIT. Here’s why:
- an isolated Content Website is an asset, not a company, lacking a (management) team, proprietary IP, dedicated tech, history, diversification, and international reach. No institutional investor would touch an asset, they’re looking for companies
- size matters through the lens of an institutional investor or big media company, starting at around $1m profit. As a PE DD can easily cost $300k and more, no institutional investor will touch small websites
- Is bigger always better? Not necessarily, but an investor or buyer in the 8- to 9-figure range will always evaluate the management team, track record, risk, and diversification of the company.
The bigger, the more diversified in terms of traffic streams, income streams, verticals, geo, the lower the overall risk due to diversification. But does valuation arbitrage really move the needle? Let’s take a look at the recent “Private Equity’s Inflation Challenge” article by Bain: 💡 “Multiple expansion has been the largest driver (56%) of buyout returns over the past decade, and its contribution is only growing” Let that sink in.
Private equity companies, the most sophisticated investors specialized in acquiring and optimizing businesses, working with top-notch management teams, generate 56% of the value through multiple arbitrage, while revenue growth (=operations) only counts for 38%. Based on this back to the Content Websites with 2 cases and a back-of-the-envelope calculation:
- you’re acquiring a website for 3x, boosting the profit by 30%, and reselling the isolated asset for 3.2x after 2 years -> 39% return, good job!
- you’re acquiring a website for 3x, boosting the profit by 30%, integrating it into your synergetic portfolio, internationalizing it, getting to $1m EBIT for your company and reselling it for 8x after 2 years -> 247% return…
It’s time to think bigger, beyond Content Websites as isolated assets. While it’s hard for a private investor to allocate millions to acquire websites, set up a team, identify, onboard and optimize multiple websites, build out your strategic moat, and kick off internationalization, these are – again – all topics Aggregators or some funds are covering.