A recent surge in demand for the acquisition of interactive and digital media groups has pushed valuations for independent digital groups to new highs.
According to industry matchmakers and professional services consultants close to the design world, it is now not uncommon for valuations of these groups to reach as much as ten times pre-tax profits, far outstripping the multiples being offered for other types of design groups.
Client demand, it seems, is helping to push up prices offered by large media and marketing conglomerates for digital independents, as expenditure rapidly shifts out of traditional media into on-line advertising and search marketing.
However, there is concern that excessive valuations are approaching the ‘irrational’ levels of eight or nine years ago, just before the dotcom crash.
Willott Kingston Smith partner Amanda Merron says it is now common to see valuations of digital businesses at five to eight times pre-tax profits. Merron says that she has even seen valuations as high as 12 times pre-tax profits.
‘Particularly in the advertising world, clients are pushing traditional agencies to have a digital presence,’ she says. ‘Many clients that had digital divisions which closed in 2001, have been coming back very strongly.’
Lateral chairman Jon Bains (pictured) agrees that since the start of this year valuations have again become very favourable for digital and interactive groups in the UK, and says he has seen multiples of five to ten times pre-tax profits being offered in the current market. Bains says the market offers interactive groups plenty of opportunities for selling a stake to the right investor, or even an outright sale.
‘We are definitely going to do something along these lines, though I’m not in a position to say what,’ he adds.
Bains advises cautious optimism rather than paranoia as the best policy for the time being, pointing out that valuations are based on financial results, rather than being plucked out of the air.
‘As long as valuations are based on profits there shouldn’t be much to worry about,’ he says. ‘But nobody wants to see things get out of hand again.’
HEADING FOR A CRASH?
• Over the past 12 months, valuations of digital groups have been typically around five to eight times pre-tax profits
• Since the start of 2007, prices have begun to rise
• Valuations are now being seen in the order of ten – and sometimes 12 – times pre-tax profits
• Industry commentators agree such levels are not sustainable