Internet Valuations Sink Below Dot Com Bust Levels

From Creative Capital, December 18, 2008:

How bad has it gotten for Internet companies?

Answer: It’s worse than the dot com bust in at least one important way!!!

Roddy Moon, senior vice president with investment bank Jefferies & Co., recently shared a chart with me showing that valuations of Internet companies have now sunk below the low values last seen during the dot com and telecom bust.

(I discuss this issue in a story I wrote for this week’s issue of BusinessWeek—more TK.)

The most recent low-point for Internet valuations was the third quarter of 2002, when the price to EBITDA (earnings before interest, taxes, depreciation and amortization) multiple of the last twelve months hit 13.2. After that point, valuations began to rise, peaking in the third quarter of 2003 when they reached 31.3.

Since late 2003, tech valuations have been slowing trending downward. But they still held up in the 20s range until the beginning of 2007, when they began a steeper decline.

Just a year ago, a basket of Internet companies that Moon compiled traded at 18 times EBITDA. In the fourth quarter, the p/EBIDTA multiple dropped to a lowly 6.1. “It’s fallen off at a precipitous level,” say Moon.

The scary thing is those valuations are likely to continue to fall for the next quarter or two.

What does this mean? For one, it suggests that a rebound of the M&A market may take some more time. With valuations so low and probably going lower, this is a horrible time to sell your company. And falling valuations will probably make buyers skittish. Buyers think they will get a better deal if they wait a bit longer.

It also means that entrepreneurs should expect more painful down rounds, or rounds of financing at lower valuations than the previous round of financing. This is what happened to BitTorrent, as reported by TechCrunch.

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