Big mergers grab headlines, but small deals show that a trend has legs. Hidden behind the PMGI-Various and Ninn Worx-Spearmint Rhino deals is a wave of mergers and acquisitions that shows how pervasive today's merger-mania really is. While nine-figure deals are fun to watch, small acquisitions may be more important, offering entrepreneurs a viable exit strategy - finally.
When Tanc TV acquired Adult Film Entertainment, nobody noticed. After all, Adult Film Entertainment had only a few hundred daily page views and a rudimentary user interface. Most sophisticated deal-makers and website operators would have sneered if the news ever reached them. Tanc TV acquired a concept and potential, two commodities that went out of fashion when we all watched the NASDAQ nose-dive in March 2001. It seems Tanc TV's Joe Grande may have the last laugh.
Tanc TV is the successor property to Grande's AdultHearsay.com. Focused on adult entertainment industry news, Tanc TV has grown aggressively and now boasts 25,000 members. The roots of the merger, though executed by Tanc TV, extend to AdultHearsay.com. Adult Film Entertainment founder C.K. Damien contacted Grande by email, seeking a partnership to facilitate mutual traffic growth and website promotion. Upon hearing the concept of Damien's website, Grande was intrigued.
Adult Film Entertainment is nothing more than a website that ranks porn stars. The idea is not new, since several publications and websites have variations on the "Who's Hot?" theme. But Adult Film Entertainment differentiates itself by its method. Instead of choosing favorites by performing style, sex acts or looks alone, Damien uses a rigorous set of criteria to create what can only be described as a "hotness index" that is used to deliver quantitative results.
The unique approach caused Grande to become involved in Damien's creation first in a public-relations capacity. As he began to understand the company's potential, though, he became interested in making an acquisition. The pre-existing relationship gave him a chance to kick the tires before engaging in something more substantial. After evaluating the potential of Adult Film Entertainment and launching Tanc TV, Grande proposed the acquisition to Damien. Once the acquisition decision was made, the process was swift and relatively painless.
The mechanics of the merger were swift and fair, Damien said. A neutral party created the contract, which facilitated the sale of Adult Film Entertainment to Tanc TV. Damien did not disclose specific terms of the agreement, but he said a monetary payment was part of the transaction. As for his current earning potential, Damien has indicated that he monetarily participates in the website's success, but he did not disclose details about the revenue share.
For Damien, the decision to sell was not trivial, despite the fact that Adult Film Entertainment did not generate any revenue at the time of the proposed acquisition. The entrepreneur has a vision for his company, and selling the company meant that he would not have complete control over execution. "We all have egos," Damien said. "Nobody wants to sell his own ideas." But he said he realized that the nature of the market made it necessary. He said growth had slowed and he thought he had brought the company as far as he could under his own steam. The sale, he said, "was the right move in order to make it bigger."
Acquisitions at this level probably are a new phenomenon. For a company to be interested in buying another, tangible value is critical. There has to be something on which to anchor the business's value, from hard assets to a stream of revenue. For those in the affiliate game, trying to attract traffic in high volumes in order to find the miniscule portion that will whip out a credit card and convert, the possibility of generating enough revenue to make a sale worthwhile to the acquirer (and the seller) is remote. This is exacerbated by the continual investment in search engine optimization, text link ads and other tactics that are necessary to maintain traffic levels.
It seems that differentiation has made acquisitions possible even for those who are tied to continued investment in attracting traffic or who have tiny revenue streams. For a larger network, innovative thinking may have pent-up value that can be quickly exploited for direct revenue gains. This is Grande's wager, as he appears to be hoping to unlock hidden value in Adult Film Entertainment by providing a larger base of users to the original content developed by Damien.
Even without disclosing the terms of the deal, Damien has made it clear that he doesn't plan to retire. He is aggressively marketing Adult Film Entertainment in order to continue benefiting from the relationship. He now has a platform for growth and a larger revenue opportunity than he did prior to the merger. In fact, this new operating environment has energized Damien to continue investing in growing his website. After laboring with flat traffic statistics, he said he sees new hope for growth. "This is definitely a long-term effort," he said. "I'm not going anywhere."
The implications for other small startup content companies are salient. Traditionally, such a company has a useful life equivalent to the founder's attention span. The owner-operator manages the website for a few years, hoping to eke out some affiliate revenue, investing countless hours in pitching content, linking with other websites and writing endless amounts of optimized copy to court Google's algorithms. If the effort does not pay off, the entrepreneur is left with nothing to show for all the late nights invested. Tangible and intangible costs are sunk when the founder concedes defeat.
Small-time mergers and acquisitions offer an alternative to closing shop when a startup seems unlikely to yield returns. The right partner and a properly structured deal can deliver the capital, user base, or design and development resources necessary to help a business realize its potential. And it provides a more attractive and lucrative exit strategy than simply giving up.
Large institutional investors are perpetually focused on the "liquidity event" (i.e., an opportunity to cash out) even before they start to negotiate an investment in earnest. Before buying a company, they want to know how they will get their money (and more) back. Paper wealth is nice, but cash is always preferable. Small adult businesses, though, have only rarely had access to liquidity events. Instead, they have had to enjoy whatever cash flow they could generate while in operation. The close of such a business has meant the cessation of cash.
Adult Film Entertainment has shown that liquidity events are possible for small startup adult businesses, even if the payment price is small. A business with an innovative concept that can add value to a larger company may fetch a sales price, even if it has no cash flow and relatively low traffic numbers. The key, especially with a commoditized product such as adult content, is to have an idea that a potential buyer can see as supplemental to a broader platform. With the promise of new thinking envisioned by the acquirer, a check may be forthcoming, even if operating revenue is not.
This article originally appeared in the August 2008 issue of AVN Online magazine. To subscribe, visit AVN Media Network.
