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News Corp deal for Wireless Generation is great, but it doesn’t make sense

November 24, 2010, 12:02 AM UTC

By Rafael Corrales, contributor

Rupert Murdoch’s News Corp. (NWS) just purchased Wireless Generation for $360 million. Technically it’s $360 million for 90% of the company, but either way it’s a lot of money.

When a company in your general space gets bought for a huge amount by an unnatural acquirer, it merits some attention. But before I go on, I want to congratulate the Wireless Generation team on the acquisition. Good for all of you!

As Audrey notes, this is on the heels of News Corp appointing NYC Schools Chancellor Joel Klein. So with that hire, and the WG acquisition, it looks like News Corp is getting into education technology in a big way.

But so much of the above just doesn’t make sense. Here’s why:

  • A high revenue multiple for a business with tough sales cycles: As of this summer, Wireless Generation was on a $60 million revenue run rate. Given that the News Corp purchase essentially values the company around $400 million, that means News Corp bought the company at a +6.5x revenue multiple. That’s crazy. Just one more point of context, Wireless Generation has been around roughly 10 years.
  • Where are the profits? Wireless Generation isn’t a wildly profitable company. In 2007, the last year I have detailed financial data on them, they were not profitable and they had about 250 employees. Now they are up to about 400 folks, and perhaps they might be investing in people ahead of growth, but even then I’m not sure that a wildly profitable business will ever be there.
  • Was anyone else at the altar? I had to get on the phone and chat with a private equity guy about this. He agrees with my arguments in this post, and was actually at one of the shops that looked at their business at one point. Let’s just say he choked when he saw the purchase price.
  • No unique advantages for News Corp: when an acquirer is looking to make a deal of this size, usually they enjoy some unique advantage. For example, if you are Google and you purchase DoubleClick or YouTube, it fits in very nicely with your core business model. News Corp is a media company. That’s film, cable programming, TV, satellite broadcasting, newspapers, magazines, and a small publishing business. Actually, if you dig into their annual reports, education or anything related to education is not one of their core eight operating segments. So where does Wireless Generation fit within their core competencies?

I’m very happy for the Wireless Generation team — they pulled a rabbit out of their hat and were a ~10 year overnight success. They sold a non-attractive business at a high revenue multiple. But they just got bought by a company, News Corp, that likely has no clue what to do with them. And just because News Corp has Joel Klein now, it doesn’t mean they will know how to manage this kind of business, let alone figure out a way to justify the purchase price.

It’s going to be a tough road ahead for the new Wireless Generation entity.

Rafael Corrales is founder and CEO of LearnBoost, a venture-backed creator of online gradebooks for teachers. This post first appeared on the company’s blog.