By Petros Nafpliotis, Law Writer at KCL Mergers & Acquisitions Society
The deal shows how higher commissions on advertising revenue by media platforms such as Facebook and Google have led to news media sites struggling for survival. Looking for new income streams, BuzzFeed acquired HuffPost to benefit from its loyal, more affluent audience.
Deal Background
Last November, BuzzFeed announced that it was acquiring HuffPost (originally Huffington Post) from Verizon Media Group (‘Verizon’). As part of the deal, which was fully paid in stocks, Verizon will become a minority shareholder in Buzzfeed and invest in the combined company. While BuzzFeed’s current chief executive and co-founder of HuffPost, Jonah Peretti, will lead the combined business, BuzzFeed and HuffPost will remain independent.
The stock-for-stock deal was made public shortly after both companies made deep cuts as a result of falling advertising revenues and only six months after BuzzFeed ‘pulled the plug’ on its news operations in the UK and Australia, which had seen ‘losses quadruple in 2018.’ It is evident that although both companies were once exploding into the media scene, the swallowing of larger advertising shares by Facebook and Google has taken its toll on both companies’ revenues, bringing their growth to a halt.
Stock-for-Stock deals
Stock-for-Stock deals occur when the buyer company trades its shares for the target’s instead of paying the acquisition price in cash. This is done by specifying a conversion ratio which dictates the amount of shares the seller will receive in the buyer company after the target is acquired. Thus, an X:Y conversion ratio means that per X shares the seller company (Verizon) receives in the buyer company, the buyer (BuzzFeed) will receive a Y number of shares in the target. While acquisitions can include both cash payments and shares, BuzzFeed’s acquisition of HuffPost was paid fully in stock.
This type of acquisition is generally cheaper and more efficient because the buying company is not required to raise any capital prior to the acquisition. This eliminates the need for future expenses such as paying back interest on a loan. As a result of the deal being stock-for-stock, BuzzFeed has now allocated a percentage of both the value and risks of the acquisition to Verizon, in proportion to the percentage of shares that Verizon acquired in BuzzFeed due to the acquisition. In a cash deal, on the other hand, BuzzFeed would have undertaken the entire risk of the acquisition not being profitable, being the sole bearer of any losses.
Benefits of the Deal
Although some have framed the acquisition as ‘Verizon Media Group paying BuzzFeed’ to take a failing HuffPost off its hands, the move will provide BuzzFeed with more experienced reporters, which it can use to expand its news coverage after the aforementioned layoffs made by BuzzFeed news.
While it is true that HuffPost is not as reputable as it was after its 315-million-dollar acquisition by AOL in 2011, one of its biggest strengths is its healthy and loyal audience. Over the past three months, HuffPost’s website has been visited by a monthly average of 81 million unique users, about quadruple the amount of BuzzFeed news; more than half of which (57%) visited HuffPost’s website directly.
While both media giants will attempt to continue to define the media landscape, crucial to the deal’s success is the fact that the two companies have had different target audiences since their inception. 37% of HuffPost’s visitors are over the age of 45, according to SimilarWeb, which are more affluent than BuzzFeed’s price-conscious teenage audience. As the audiences of BuzzFeed News and HuffPost do not overlap, the deal will effectively give BuzzFeed a new audience of 100-million unique monthly users. It is therefore clear that, in the words of Jonah Peretti, “with the addition of HuffPost, [BuzzFeed’s] media network will have more users, spending significantly more time with our content than any of our peers.”
While times are tough for advertisement reliant news sites like BuzzFeed News and HuffPost, this deal represents a real vote of confidence and belief after many years of shocks and only a few success stories in the industry.
Australia’s News Media Bargaining Code
While the regulation of digital platforms is being considered worldwide, the Australian Competition and Consumer Commission (ACCC) has suggested a new arbitration model approach which aims to address the significant imbalance in bargaining power between media giants, like Facebook and Google, and news businesses. The News Media and Digital Platforms Mandatory Bargaining Code Bill 2020 (the “code”) was released for public consultation in July 2020 and was passed by parliament on the 24th of February 2021.
As previously explained, the substantial increase of advertising commissions by Google and Facebook, coupled with the increased advertising costs that came with the Covid-19 pandemic, has led to many news media sites struggling to make ends meet. Therefore, the code is seen as a way of preventing the continuing decline of ‘public interest journalism.’ (defined by the ACCC as journalism that performs a critical role in the effective functioning of democracy at all governmental and societal levels.)
The code will initially apply only to Google and Facebook and is comprised of a framework for mandatory negotiation between news media businesses and digital platforms, a set of minimum standards for the treatment of news on digital platform services, and recourse to binding arbitration if negotiation fails. Effectively, this means that if the parties fail to reach a remuneration agreement during the set three-month negotiation period, the news media business can elect to bring the dispute to compulsory arbitration. The arbitration process, known as ‘final offer arbitration,’ will involve both parties submitting a final offer on the remuneration to be paid by the digital platform. A panel of arbitrators will then determine which offer is to apply by considering the benefit of the news provider’s content to the digital platform’s service, the parties’ costs, and whether the proposed deals will place any undue burden on the commercial interests of the digital platform. A failure to comply with the final order of the arbitrator may lead to a 10 million Australian Dollar fine. This form of arbitration is expected to achieve maximum efficiency and is aimed to produce the best results within a small time period.
The new code was not received with open arms by Facebook and Google, with both media platforms threatening to withhold news services in Australia. Google, while not following up on the threats, insisted that the code would encourage the enactment of more dangerous measures. Google argued that the code would be harmful in the long run, as digital platforms operate as free services and requiring payment for what used to be free data collection will strike at its business model’s core. However, Google eventually entered into licensing arrangements with Australian news businesses; Preferring annual payment deals rather than the alternative ‘pay-per-link’ system, which was considered to be too big a hindrance to Google’s Business model.
Facebook, on the other hand, followed up on its threats, as Australian users were unable to share news links and publish anything news related to their Facebook Pages. This had a more dire effect than Facebook initially thought, as due to the ban, the Australian news sites were unable to post updates concerning vaccinations, causing public discontent. After negotiations with the Australian government, Facebook allowed Australian news sites back onto the platform on the condition that minor procedural changes were made to the Bill.
Currently, Facebook and Google are trying to send the message that Australian news sites are currently more trouble than they are worth. However, with Microsoft president Brady Smith supporting the ACCC’s code and inviting news media sites to transfer their advertising to Bing with no costs; and following the potential adoption of similar regimes worldwide seeming even more likely, the digital giants are unlikely to threaten to withdraw their services from larger markets such as the UK and EU. Such a move will both give their competitors a huge boost in the public eye and competitive advantage.
Covid-19 has led to pandemonium in the digital news market, and the acquisition of HuffPost is an attempt by BuzzFeed’s to increase their revenue which has seen a sharp decline. The adoption of final offer arbitration measures around the globe may also play a role in alleviating the pandemic’s harmful effects on news sites. But for now, it is too early to comment on the long-term effects of such measures with certainty.
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KCL Mergers & Acquisitions Society
The KCL M&A Society (KMA) was founded with the goal of providing students with valuable information and opportunities regarding the field of Mergers & Acquisitions. KMA aspires to provide students with a platform to learn and improve their skills whilst delving into the synergies of law and finance.