CBS - The CNET Acquisition

The acquisition of CNET by CBS – let’s take a quick look at the numbers.

I began by checking out the Balance Sheet, and as a content and media company, one would expect what I saw – relatively low base of assets and liabilities. Pretty tough to determine the value of CNET based on assets on the books.

Then moving to the Income Statement, annual Revenues have been growing modestly each of the last three years (from Yahoo! Finance):

2005 = $354 mln.
2006 = $387 mln.
2007 = $406 mln

But the bottom line income tally reveals the results of some interesting accounting activity:

Total Income 2005 = $19.6 mln
Total Income 2006 = $6.8 mln
Total Income 2007 = $176 mln

The jump in 2007 looks impressive, until you see that CNET accounts for a $178.8 mln “Income Tax Expense,” thus propping up the overall bottom line income for the year.

Looking at the Cash Flow Statement, nothing here seems terribly appealing.

Change in Cash Flow 2005 = $26.3 mln
Change in Cash Flow 2006 = ($24.5) mln (CNET paid off $125 mln from convertible notes issued in 2004.)
Change in Cash Flow 2007 = $57.3 mln

Aside from debt retirement, it seems that cash flow situation seems is fairly stable as you look at cash flow from operations. But, nothing seems particularly compelling or attractice here from an acquisition standpoint.

So what does all of this mean in terms of the $1.8 billion price paid by CBS for CNET? The $1.8 billion represents a premium price per share of $3+. It also represents about 4 times revenue, slightly less than the price Microsoft offered for Yahoo! (which was 6 times revenue). CBS isn't in a situation where top line revenues really matter, so to acquire CNET simply to add to top-line revenues probably isn't a valid reason for the acquisition.

Total annual income is unimpressive, and the annual changes in cash flow are appealing but don't provide the case for the acquisition either. Overall, as seems to be the case when old media companies are attempting to keep with consumer demand for innovative content, the $1.8 seems to be an overpayment. CBS is obviously buying the CNET brands in hopes (yes, hopes) in evoling these brand names to consumer mindshare.

The bigger question is whether or not CBS can convert and integrate the acquisition into a positive gain to justify the price. I’m guessing not.