Jeff Bezos Paid a 'Friendship Premium' for The Washington Post
According to the "real" world of financial metrics, Jeff Bezos got ripped off when he purchased The Washington Post this week, spending almost four times what the newspaper is actually worth. That's good news for
journalism anyone who owns a brand-name newspaper, even if it's not the best investment.
"Bezos paid a friendship premium of $200 million here," Ken Doctor, a media analyst, told Bloomberg. And Reuters, in the same vein, explains that if you use valuations of other recent media deals and newspaper sales, The Washington Post is really worth closer to $60 million. Again, Bezos spent $250 million.
The reason Bezos spent that much is because, for better or worse, it appears that traditional metrics and rules don't apply to a brand like The Washington Post. That may sound like shocking news considering everyone is saying that journalism is dead, that many people thought this WaPo deal was a steal, and the sad fact that The New York Times just lost a lot of money selling The Boston Globe. If a struggling paper like The Washington Post can command four-times more than it's actually worth, then there's hope for journalism as a business, right?
What we have to understand is the way people usually look at companies is through a metric called EBITDA (earnings before interest, taxes, depreciation and amortization) and newspapers usually command 3.5-4.5 times their EBITDA figure. Reuters further explains that: "Morningstar analyst Liang Feng estimated that the Washington Post's newspaper division posted EBITDA of $15 million last year [this gives us that $60 million valuation] ... Based on those estimates, Bezos paid about 17 times 2012 EBITDA."
"The reality for newspapers like the Washington Post is it's impossible to use traditional financial metrics ... These are trophy assets whose value is in the eye of the beholder," Paul Zwillenberg, a partner at The Boston Consulting Group, told Reuters, which explains why a brand name newspaper like the Post is like buying a popular sports team than a publishing company. "The Washington Post’s status as a marquee newspaper may help justify the price," Bloomberg's team adds.
So if there's all this value and people want to pay for papers, what's the downside? Well, this magic rule-bending valuation, like buyers do when it comes to teams like the Yankees or Lakers, only applies to marquee newspapers. And the other thing to keep in mind, is the more sobering fact of the business potential: the Post's profits are still very low. Yet the Post's price tag could actually be much higher than one-fourth of the price of Instagram if it ever figured out how to be more profitable. And Bezos knows this.