LinkedIn announces first social media IPO of 2011: dot.com hype or sustainable business model?

It is a sign of the changing times that I learnt about LinkedIn’s IPO through twitter last night, and that LinkedIn itself blogged about it.  Seasoned IPO watchers will be aware that process has been started with the filing of their S-1 Registration Statement at the US Securities and Exchange Commission.

At this stage, details of the price and amount of stock to be offered in the IPO has not been finalised, but the S-1 contains (amongst other things) a detailed overview of the business including  financial data and risk factors. For those interested in the business model for social media companies it makes fascinating reading. With rumours of IPOs planned this year for other social media platforms the valuation metrics will set interesting benchmarks, which will also impact the mid-market as the large social media platforms acquire businesses to add incremental capabilities.

As a scarred member of the dot.com 99% club (the company I was then working for had its valuation fall in 2001 to 1% of its value in 2000) the question occurs to me is whether the current interest in social media is dot.com hype or represents sustainable value creation. The things that make me feel like it is 1999 include that everyone is talking about social media, there is conference and news overload and woe-betide any company without a ‘social media strategy’. Even my mum talked about it at Christmas. However, against that, there are a lot of us who remember the dot.com crash and that in the wake of the 2008 global financial crisis valuations seem to be very focused on fundamentals (like cash generation) rather than a story which goes ‘build cool web-site, get funding, worry later about how to make money’.

LinkedIn’s S-1 has its normal quota of risk factors, but also has real revenue streams which were sadly lacking in some dot.com companies. A more subtle difference between social media businesses and web 1.0 is the innate ability of social media networks to benefit from network effects, which raise users’ switching costs and create greater barriers to entry than exist for transactional web-site businesses. However, these are not insurmountable (anyone still use FriendsReunited?).

Thank you to the kind reader who suggested that a Friday round-up of this week’s blog posts would be useful.  In reverse order:

Have a good weekend.  Finally, being a lawyer – I am not connected to LinkedIn (except as a user) and you should make your own mind up before you invest (or not) your own money – don’t take any advice from me.

Financial technology, cloud, mobile data and social networking will drive deals and valuation multiples in technology sector

As a new blogger, site statistics are a source of endless fascination.  They are however useful – my post on TMT valuation multiples seems to have been wildly popular, so I thought it worthwhile to trawl through some other reports to see what commentators were predicting.

PwC‘s technology insight presentation caught my eye.  It is a perceptive commentary on M&A trends in the technology sector, not only identifying hot areas, but also the drivers behind those hot-spots.

The first area identified is financial technology, with ongoing regulatory scrutiny and change within the banking vertical driving demand for integrated software and outsourced platforms. They highlight the Misys acquisition of Sophis as an example of this type of deal.

The second area is cloud services and the various activities within that space such as hosting, virtualisation and security. Reinforcing the theme of my last post, PwC sees relatively high valuation multiples for deals in this segment.

The third area is mobile data, which again is something of a recurring theme for this blog. The sub-segments highlighted include applications, gaming and advertising – all of which I agree with based on the recent deals we have seen.

I am less convinced with their last identified area – that of the public sector. As a result of the cuts in the UK, overall revenues are likely to fall so I would see deal activity being primarily defensive and with somewhat depressed valuations as compared to other segments.

Finishing with a personal view on another hot-spots for the year,  one segment that I think will be very hot is social media, with both IPOs for the large players possible, and also mid-market deal activity as the larger players acquire smaller players for capabilities to integrate into their platforms.

Valuation multiples up in TMT sector: trade buyers are back for 2011

I get a regular selection of recent corporate finance deal activity summaries in my email.  Last week, I got one from Regent.  Their view was that with the exception of a dip in August, valuation multiples in the European TMT sector have steadily edged upwards over the year, with:

  • price / earning at 16 (as opposed to 14 this time last year); and
  • price / sales at 1.1 (up from 1.0 this time last year).

However, for me, the story behind the story (so to speak), is the return of the trade sale.  The IPO market for tech companies has been ‘sleeping’ for some time (although with Facebook and LinkedIn rumoured to IPO for this year it is starting to feel oddly like 1999 all over again) and post-Lehman the lack of (as much) leveraged debt has removed one of private equity’s key advantage over trade purchasers. 

As a result the activity across the market (and certainly the cross-section of deals I am seeing) are, by and large, trade deals.  Expectations of slow growth for some time in European markets has led to sellers being realistic about valuations and my expectation is that 2011 will see continued deal-flow, with trade buyers and sellers predominating.