A Second Look at Sectors and Stocks
Valuing social-networking companies is a popular sport, more so with current talk of initial public offerings by Facebook, LinkedIn and Twitter. The most reliable valuations available, those implied by recent private-equity and internal company deals, make Facebook look pricey, LinkedIn look reasonable and Twitter look incomprehensible.
Using prices from internal company share deals, advisory firm and market-maker NYPPEX puts the implied value of Facebook at $7.6 billion, LinkedIn at $1.25 billion and Twitter at $1.13 billion. NYPPEX also provides estimated 2010 revenues for Facebook and LinkedIn: $710 million and $205 million, respectively. Twitter, which has said that next year will be the year when it will really begin to monetize its base, is expected this year to generate revenue of $1.3 million.
Fnding a valuation multiple is trickier.
There are no pure-play, publicly traded social-networking companies with which to compare. Google /zigman2/quotes/205453964/composite GOOG -1.23% , the original high-growth Internet media company, trades at 16 times trailing earnings before interest, taxes, depreciation and amortization, or Ebitda.
Assuming an Ebitda margin of 30% and adding 20% for a simplified discount rate gives a medium-term revenue target—say, four years out—of $1.9 billion for Facebook, $310 million for LinkedIn and $283 million for Twitter.
If LinkedIn can in fact earn $200 million next year, just $100 million in incremental revenue will get the company to this target. That amounts to 50% growth. Facebook, by contrast, will have to almost triple its revenue to get to its target.
Twitter, given that it generates next to no revenue now, will be starting from scratch. If the company has an IPO in the near future, investors will be left to speculate about how easily and quickly Twitter can convert its user base into revenue. While they are at it, they may want to predict who will be elected president of the U.S. in 2016.
Paul Sharma and Robert Armstrong
A Sanofi new deal
Tapping consummate deal maker Serge Weinberg as chairman of Sanofi-Aventis would symbolize another step in the company's evolution beyond France's borders, and herald other possible changes in deal making. Expect the company to boost generics, where it has a presence as a result of last year's acquisition of Zentiva.
Changes in Sanofi-Aventis's corporate behavior must be seen in the context of the quiet shakeup being undertaken by its chief executive officer, Chris Viehbacher .
Just one year into the job, he has already axed less-promising development projects, set his mark firmly on the vaccines field and done relatively small, regional deals such as the acquisition of India's Shantha Biologics.
Still, bidding for developing-world assets in vaccines could be tough, given that both Novartis and GlaxoSmithKline /zigman2/quotes/209463850/composite GSK +0.89% have staked claims to this approach.
Sanofi-Aventis could try to increase its focus on biotech, meaning likely alliances with U.S. companies, although only a large takeover would fully enable it to overcome the losses of key brands such as anticancer drug Eloxatin and cardiovascular products Plavix and Lovenox.
Divestments are a possibility. The recent $4 billion opportunistic purchase of Merck & Co. /zigman2/quotes/209956077/composite MRK +0.64% Inc.'s animal health business, Merial, isn't an obvious fit with human health; opponents of diversification will argue for its eventual disposal.
A cross-border merger with U.S.-based Colgate-Palmolive may be tempting for Reckitt Benckiser Group, but the U.K. health and personal care company should look elsewhere if it truly wants to make an acquisition.
No doubt a merger between Reckitt and Colgate would provide each with complementary product categories and access to respective distribution networks in North America and Europe. Still, for Colgate it would mean having to forgo higher exposure to emerging markets in lieu of greater scale in low-growth Western Europe.
Reckitt's diversification strategy has paid off in the downturn. In the last couple of years, it has outperformed its European peers—Beiersdorf /zigman2/quotes/210479173/delayed DE:BEI -0.52% AG , Henkel AG and L'Oreal SA— in the personal-care sector, with like-for-like revenue growth in the high-single/double-digit range. That's a sign the U.K.-based company's management is fully capable of expanding the business organically.
Its track record gives Reckitt the option of simply continuing to pursue this route of growth, preserving cash now while looking to part with it only if and when real opportunities arise. In the near term, however, it would do well to look at Sara Lee Corp.'s disposable household brands, which include Kiwi shoe care and Ambi Pur air freshener.
Such a deal could be accretive, as long as it gets done at multiple of 8 times to 10 times enterprise value to Ebitda, a discount to the 12 times at which Reckitt currently trades.
That wouldn't be a big reach for Reckitt, whose business has historically generated high and stable operating cash flow averaging roughly £1 billion ($1.65billion) yearly since 2004.
Alessandro Pasetti and Sameer Bhatia
Think Again uses material from Dow Jones Investment Banker. For more information, visit www.dowones.com/banker