Why digital news IPOs are so rare
Want to buy stock in the fast-rising digital news business? That is easier said than done.
They fit the profile — big, fast-growing, around long enough to claim staying power. But the trajectory of digital news businesses suggests that, even so, we may never get a chance to buy shares of either company.
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I checked with Charles Elson, a friend from his days at Stetson University Law School here in St. Petersburg, who now is a widely quoted expert on corporate governance with his own study center at the University of Delaware.
Together we came up with a lengthy set of reasons why digital news is not typically a match for Wall Street.
- An IPO candidate needs to be really big — a plausible valuation well north of $1 billion, revenues (not just audience) that are rising fast and likely to keep that growth pace well into the future. Better yet, the market should be persuaded that a big infusion of capital from the IPO will accelerate growth.
Platform and entertainment companies (think Netflix) can reach the threshold. Even successful digital news companies are likely to fall short.
- Promising digital news sites are typically sold upstream before they would be ready to go public. "What is most advantageous in to find a big fish (to acquire you)," Elson said. "They will pay a premium, provide the capital you're looking for,"and you may be able to negotiate independence (for founders to continue running the company).
Some examples would include HuffPost, acquired by AOL, or Curbed and Recode, both bought by Vox Media. The Daily Beast, which never fulfilled early growth hopes, ended up part of IAC, which also owns Newsweek.
- Similarly, upstream companies often take a substantial minority investment position in digital news stars. For Vice, that's Disney; for BuzzFeed, NBC/Universal. That gives the corporate investors an inside track to an eventual takeover.
- Going public "entails a lot of big costs," Elson said, platoons of lawyers and specialist investment bankers and advisors. The regulatory financial burden continues indefinitely with required filings and complex accounting rules.
- Digital media startups may have some funky accounting practices (valuing future returns on marketing, for instance), that are OK with their venture capital backers. That goes away with going public — the SEC sets the rules on keeping the books.
- Even if all the stars are aligned correctly, a lot can go wrong after an IPO. Twitter tanked after a promising opening month in 2013 and now trades at less than half its price then. Snap, Inc. (more a platform than a media company) has seen its shares tumble similarly over concerns that growth is slowing.
Groupon is still in business, still a public company, but fell from a $20 opening price and some short-term gains in 2011 to stalled growth and a current share price of $3.12.
- Staying private is an attractive alternative. Vox Media, for instance, has grown from a single sports blog in 2002 to a family of eight of them. And it has seen its valuation go from $380 million to more than $1 billion over the last two years. All of that is through successive rounds of investment. CEO Jim Bankoff has indicated little interest to date in putting an IPO together.
Elson told me one of his current academic interests is dual-tier public ownership, where the founders or founding family retains voting control — and a degree of independence to run the company as they wish. That structure was popular for the latter third of the 20th century but has fallen out of favor with investors.
Newspaper stocks — The New York Times, The Washington Post and The Wall Street Journal/Dow Jones — all adopted two-tier shares as they went public. Newspapers then seemed an impregnable business, and the primary owners had the clout to keep control, inviting investors along for the ride.
That would be a tough sell anymore, especially given all of the other hurdles for digital companies to get to IPO readiness in any structure.
I was reminded that when Google went public 13 years ago with two tiers of stock, founders Larry Page and Sergey Brin published a lengthy manifesto, saying they planned to run the company their way rather than bow to Wall Street.
There was mixed reaction then — some saying, in essence, who do these guys think they are? Of course it has worked out just fine for Google/Alphabet's business growth and for early and later investors.
But as many notable digital news successes as there have been and more in early stages, I would say, "I watched Google grow — and you're no Google."