"Completing" Six Apart and Making a Business Case for the Deal

In my experience, I think I've gained at least a rudimentary conception of value creation in acquisitions, and how to evaluation acquisition targets.  Sometimes, you get a good financial buy, where you are able to pickup an accretive stream of operating income for a good price.  On top of that, operating synergies may exist that allow you cut some overhead and, again, improve your bottom line given your purchase price.  Other times, you have strategic synergies that allow you to distribute your product in other markets or up/cross sell products.

Today's announcement of Six Apart's Acquisition of LiveJournal, to me, anyway, fits a different catagory.  I don't necessarily believe that it gives its users a more fullsome offering, because I think that the user bases are dramatically different and I don't think you have people.  However, where it does make sense is that the offering seems more "whole" as a company now.  The two companies are amazingly complimentary, with LiveJournal really fitting nicely as a free offering to go with the paid Typepad service and liscenced Moveable Type software.  Perhaps that might make it more attractive to a strategic, but I'm not entirely sure that makes the most business sense.  To what end do you create a company that touches all the bases when all of the bases might not be independently viable?   Fred argues that there exists a great opportunity to "monitize" the LJ content with ad placement, but I don't think the average LJ user would be too happy having ads on "their" space.  I think Danah would probably cringe at the mere mention of the word "monitize."  I wrote on Fred's blog that I think you'd see the kind of outrage that baseball fans had when Selig tried to put Spiderman ads on the bases. 

So, yes, now Six Apart is "more complete."  I can see that and perhaps that makes them more formidable, but better?  Not sure.  It kind of makes me think of the General Motors strategy of putting a car in every single damn segment they could find.  At one point, the company had close to 100 different models.  Some were profitable, some not as much, but you always knew that somewhere, GM had a car for you, no matter who you were.  I guess I'm not sure where "complete" gets you. 

I don't think you can upsell the LJers into Typepad, and even if you could, you didn't need to buy them to do it... I'm sure they are aware of the service regardless.  In any case I never liked the idea of buying customers you couldn't win on your own. 

So everyone keeps saying that Six Apart is now better because its bigger, more diversified, has a complete set of offerings... and while those sound better, I guess I haven't heard anyone really come up with a believable business case on how this will translate into better earnings and value.   

Perhaps they just didn't spend that much on it?  That might be the key.  If the stats are right, and LJ has about 90,000 users paying $25 a year, they're bringing in about $2.25 million.  Now, let's say that the acquisition went at a very healthy 4x multiple of sales, making the purchase price about $9 million.  They've raised a little more than that, but not much more, so this would represent a big chunk of the venture money they raised.  Let's say its in the $7-9 million range, so we don't assume they went and spent all their money in one place.  I have no idea what it really was... I'm just pulling numbers out of my butt.  (Well, the multiple isn't out of my butt... you usually see private venture companies go at about 3x forward sales, plus or minus a turn.)  At $7-9 million, with estimates of about 2.5 million *active* LJ accounts, you basically paid $3-4 a viable customer.  Now, the question is, is that expensive or no?  I have NO IDEA.  I mean, can those blogs generate that kind of dough each?  What if only 25% of LJ users (which would be some pretty good penetration) sign on for whatever advertising or business proposition you send their way... now you've got the number up closer to $16 a viable customer and that seems like it would be tough to make back.  Remember, while bloggers can make a lot more than this with contextual advertising, the blog service doesn't get a piece of that.  If the service got a cut, that would be different, but bloggers *own* all the equity in their blogs the way its set up now.

If anyone else has any shorthand models they want to throw around here, I certainly welcome them.  This is about as halfassed as you can get, but its a start.