Spinnin’ Records was sold last year to Warner Music Group (WMG) for more than 100 million dollars. Good for the owners of Spinnin’ and possibly also for the buyers. But how did the purchase price come about? Which (digital) value components are included and considered with an acquisition? And which strategic choices form the basis for the acquisition?
Reasons for the acquisition
There are various reasons for making an acquisition. The most well-known are strategic and economic reasons. In this case, WMG can be seen as a strategic buyer. Evidently, they saw great value in the digital network that has been set up in a constructive manner by Spinnin’. The buyer saw its digital turnover grow by 30 percent. While the non-digital turnover only increased by 13 percent.
WMG’s profit grew considerably in one year. In the first/second quarter of 2016 there was still a loss of 7 million dollars. In the same quarter in 2017, a profit of 143 million dollars was listed. While it cannot be said for sure, it seems obvious that WMG is busy working on further digitisation and growth. From the latest financial report, it appears that this evidently produces healthy financial results.
The effect of digitisation
The acquired Spinnin’ Records also enjoys a healthy financial position. This is apparent from the public documents. The digital network of the label has grown considerably in the last five years. A mere two years ago, Spinnin’ Records’ digital network was estimated to have a potential value of over 40 million euros, now that figure would be more likely between 140 and 160 million euros.
In the last five years, I have developed a new way of valuating companies together with Pim van Berkel. One of the first valuations was based on an extensive data analysis of Spinnin’ Records’ digital ecosystem. In the last two years this system has been further developed into a strong digital network. In the meantime, the purchase price of this data has become known. More than 100 million dollars. That is not far removed from the estimate at the start of 2017 that we made on the basis of the new company valuation.
Digitisation also creates goodwill
The Netherlands plays a pioneering role when it concerns the digitisation of the dance industry. We can thank artists such as Hardwell, Martin Garrix and Afrojack and labels such as Spinnin’ Records for this position. Their fans are from the digital first generation. Dance artists and labels primarily use the digital ecosystem to reach fans.
Digitisation has an important effect on the value of a company in the dance industry. Previously that has become evident through transactions such as those of ID&T and SFX. With the application of the usual valuation methods (such as intrinsic value and the multiple method) the value of ID&T would be approximately 20 million euros. ID&T believed the company was worth more. SFX also saw the potential of the digital assets and paid a purchase price of 100 million euros. A goodwill of approximately 80 million euros.
We see the same form of valuation and transaction in the acquisition of Spinnin’. Thanks to the sharing of the digital networks and the innovative knowledge and experience of Spinnin’ Records, Economies of Scale and Economies of Learning exist. Important motives with strategic acquisitions and the associated transactions. The dance releases of WMG can now benefit from the network of Spinnin’ and the label’s digital knowhow.
Realisation of the valuation
To gain insight into the different valuation methods, including the valuation of the digital capital, it is sensible to first take a moment to look at the traditional manner of valuation. This method is based on previously achieved results. With the traditional valuation the “Earnings Before Interest, Tax, Depreciation and Amortization” (abbreviated EBITDA) is calculated as an indication of the operational cashflow.
According to public sources, the EBITDA of Spinnin’ Records was 6.5 million euros (source: 2015 annual statement). After deduction of the net debt (that we omit here due to its limited effect), this EBITDA is multiplied by a certain factor. This so-called “multiple” generally lies between 4 and 6, depending on the risk in the market. With a traditional valuation, the purchase price of Spinnin’ would be between 26 and 39 million euros. With a higher factor, the price would be in excess of 50 million.
An earlier analysis showed that the digital assets of Spinnin’ Records is potentially worth more than 55 million euros. Thanks to new revenue streams that exist by developing, optimising and using the digital network further, the operational cashflow in the future will be many times higher.
From the acquisition of Spinnin’ Records it appears that with the valuation of organisations increasingly more attention is paid to the so-called digital assets. This component is increasingly included in a purchase price. In addition to the return on investment, the real growth potential of an organisation is in its digital assets. A purchase price of more than 100 million dollars represents the vision of the buyer that they can get this value from the data.
The fact that Spinnin’ can have insight into data from millions of profiles says more about their potential cashflows than for instance its current financial results and the position on the basis of the balance sheet and the profit and loss account. This is due to the fact that data from social media not only contains demographic data, but also information about behaviour and interests.
Value of data?
Data in itself is not worth much. It’s all about what you do with it. Only when this data is categorised and processed into usable information can marketing, communication and sales processes be managed and optimised. New software, technologies and innovative organisations will make it increasingly possible to make connections, create context and actually use the potential value of a virtual network.
Consider for example the optimisation of the current revenue models and the activation of new revenue models, as well as commercial collaborations with other brands that wish to come in contact with Spinnin’ Records’ target group. The valuation method from the framework helps with this. It is possible to regularly determine, monitor and manage the digital and full value of an organisation. The company value and revenue models can be optimised with the framework.
Spinnin’ understands this like no other company and has even become its own channel. With the associated data. This enables them to communicate directly with their target group, whenever they want to. To cash in on their digital networks and the collected data has now become a reality for Spinnin’. The digital network determined to a large extent the price the buyer was prepared to pay. The task of WMG’s management is to now increase and expand the cashflow from the data from Spinnin’. Time for a good Business Acceleration Plan!
- This post is a pre-read of Part 2 — Chapter 5 of my new book ‘Digital Assets’ the translation of the Dutch publication ‘Digitaal Vermogen’.
- Also read the publication ‘EDM and the Digital Domain’