The social media land grab is over and the market reaction to the Facebook IPO spells the end for listings of social media businesses, according to analysis by Magister Advisors, M&A advisers to the global technology industry.
Magister Advisors forecasts the social media ecosystem will now see accelerated consolidation as smaller, specialized social media players combine to gain scale rather than going alone via an IPO. The “grand-daddy” of this trend could well be a sale of Facebook itself, with Google being perhaps the best buyer if Facebook’s market value continues to fall.
Victor Basta, managing director of Magister Advisors, says: “Facebook is currently valued by the market at around a quarter of the value of Google. If the share price drifts any lower, Facebook starts to answer Google’s questions about its social media strategy at a compelling value. Clearly there would be regulatory issues, but a deal would be compelling for both sides.”
Internet IPOs accelerated in the first quarter of 2012, then slowed in the second quarter, culminating with Facebook. Facebook’s post-IPO performance and market reaction point to what Magister Advisors describe as “almost certainly a full stop for social media IPOs”. In all of 2011, there were 16 internet IPOs. In Q1 2012 there were six, then four in the second quarter ending with Facebook. Even allowing for the traditional mid-year lull, Magister Advisors forecasts that social media listings will not return from the beach.
Basta says: “IPO markets were expecting Facebook to be the tide to lift all social media boats. In hindsight it’s looking like a Thelma and Louise moment instead.
“The land grab for a potentially lucrative user base is now largely over and the challenge now is flip ‘potentially lucrative’ into ‘plain old lucrative’. We forecast that the rush will be on to consolidate through M&A within the social media ecosystem. If Facebook had IPOed at a more realistic valuation, the dynamics might well have been different, but this market is now all about M&A.”
First quarter data from Facebook points to a significant deceleration in its earnings growth. While the speed of growth is still significantly faster than say Google’s, Facebook’s valuation is massively out of kilter with its earnings.
Basta says: “The valuation will have to settle down substantially unless Facebook achieves a miracle and finds a revenue stream that will multiply its revenue ten-fold. That, frankly, would be unprecedented – equivalent to calling in a ten-fold uptick in favours from everyone in the Facebook neighbourhood.”
In recent weeks, Google has acquired social media advertising business Wildfire which facilitates ads on Facebook’s platform for around USD400m. Google already owns ad-serving business DoubleClick, and its aggressive growth in the ad-serving market is a direct threat to Facebook’s future revenue, Magister Advisors predicts.
“Facebook’s difficulty is that it is not a sales-driven business in the way that Google has become” says Basta. “Facebook is more about products than sales.”
The most significant potential casualty of the closure of the social media IPO window is Twitter, according to Magister Advisors.
“It is highly unlikely that Twitter will IPO anytime soon in our view. Twitter is finding it very hard to monetise its user base and it very clear that the investor community is now solely focused on how these companies make money, quickly.”
