SEM Valuations: What's Wrong With This Picture?

Back when AOL bought Advertising.com for $435M, it was said that Ad.com's revenues were $132M. 3.3X revenues seemed like a reasonable valuation, but the reality was that 75%+ of that $132M was the media buys Ad.com made on behalf of clients. Granted, in some cases Ad.com was working on a revshare basis, but if what you're doing is taking over a banner or search campaign and running it on a revshare basis and with no volume, commitments, you're really just putting your topline on steroids. If Ad.com had claimed as revenues [Revshare minus media spend], they would've looked more like a $30-35M revs firm, and $435M would've been a crazy number to pay IMO.

There's more of that air-gulping going on in SEM today. I know of at least 4 major SEM's (two in the UK and two in the States) who claim to have revenues of GBP50M, GBP100M, US$25M and $112M, respectively, when in reality their revenues (less search billings) are 1/4th to 1/5th their stated revenue numbers.

Why count search spend under management as part of your topline revenues? Well, for starters it makes you look a lot bigger than you actually are. Second, managing the search engine billing relationship makes it hard for the advertiser to ever leave you - the old ball & chain, if you will. I can't tell you the number of times an advertiser has made a decision to leave their SEM and work with us only to find out their existing SEM owns the SE account and drags their feet when it comes time to move their campaigns into a new account.

Look at the valuations for Interpublic Group, Omnicom and their competitors, and think about what happened to Priceline when they stopped counting bookings as revenues. The right SEM accounting model is to account for service and technology license fees as revenues, and nothing else.