What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing. If you pay attention to the stock market, you've probably noticed a massive deluge of new companies going public via special purpose acquisition companies or spax throughout 2020 and 2021, more than 800 companies have used this method to go public, which is more than the past 20 years. Combined spacks are a great way for companies to raise billions of dollars, while at the same time bypassing the slow and cumbersome due diligence process associated with traditional ipos in the early days of the specnania. Many of the stacks would skyrocket, as investors bought into the hype and pumped up the price.

It would take a few months before reality sets in and the share price comes back down to earth. But as someone once said, if you're fooled, once you can't get fooled again by the end of 2021, investors had collectively lost hundreds of billions of dollars on spax. They were understandably hesitant to throw any more money into the fire. The days of raising easy money through the blank check companies were coming to an end, but there was one company that didn't get the memo.

The digital media company buzzfeed went public by merging with a stack this past december. There was no honeymoon period. It immediately started. Free-Falling, on the same day, it merged with this bag.

Today, its share price is less than five dollars, which makes it a penny stock by some definitions, but it can't be all bad right. Even if the stock price is now down, they should have been able to raise tons of cash which they can use to turn things around 890 5th avenue partners. The spec which they merged with raised about 300 million dollars for the transaction buzzfeed, was planning to use this cash to acquire rival digital media companies and achieve economies of scale. Unfortunately, because of the technicalities of spax, investors can pull their money out at the last minute.

After the merger was announced, 94 of the investors did exactly that, leaving buzzfeed with only 16 million dollars, even by stack standards. This was a complete disaster. They massively diluted their equity and have almost nothing to show for it. In this video, we'll look at buzzfeed's business model and why their spac process was such an epic failure before we move on with the video i want to thank the sponsor of our video public.com public is an investing platform that helps you be a better investor.

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I joined public and you can see what trends i'm following. If you search for at wall street millennial in the app go to public.com wsn or the link in my bio to receive a slice of stock valued between three and three hundred dollars, when you make an account with public and deposit and now back to the video Buzzfeed was founded in 2006 by jonah peretti. It started off as an aggregation website for viral articles. He developed an algorithm to sift through articles being shared online and find the ones that were going.

Viral users could visit buzzfeed as a one-stop shop for viral articles. After having some initial success, they started hiring their own writers to make original articles mostly talking about pop culture and celebrities. One of their most popular features is buzzfeed quizzes. You can take short online quizzes, which tell you things like your zodiac sign, based on your fried food preferences or tell you which harry potter character.

You would be. They also launched buzzfeed news where they publish original reporting, similar to the main buzzfeed entertainment site. It also focuses heavily on celebrities and pop culture from the mid 2000s through the mid-2010s buzzfeed transformed from a niche website to a massive digital media empire in 2016, they had 1 700 employees across 12 countries and were putting out hundreds of articles per day. They surpassed 100 million dollars in annual revenue and received a 400 million dollar funding round from nbc universal.

While things were looking good on the surface running a pure digital media company is extremely difficult. Buzzfeed is free for anyone to view and they make the majority of their money through digital display ads on their websites. The problem with digital advertising is that it's very cheap. We don't know exactly how much buzzfeed charges advertisers, but a typical rate for display ads is three dollars per thousand views or point three cents per view.

With such a minuscule amount of revenue per view. They need their articles to get tens or even hundreds of thousands of views each just to break even according to glassdoor. The average staff writer at buzzfeed makes about fifty five thousand dollars per year. When you consider payroll taxes, health care benefits and office space, it probably costs them closer to eighty thousand dollars.

All in the articles on buzzfeed aren't exactly pulled to price level, so they probably don't take that much effort to write. Let's just say, hypothetically a full-time writer. Could write three articles per day? Three articles per day translates to 750 articles per year with an 80 000 salary. This costs buzzfeed about 107 dollars per article at a three dollar cpm.

The average article needs to get 35 000 views just to break even and that doesn't even consider any of the overhead costs of running their website in corporate offices. These are just back of the envelope estimates, but the point is: if you have a purely ad supported model, you need a lot of views just to break. Even buzzfeed has become extremely popular among the younger generation because of their content, simplicity and ease of reading. They have over 500 million monthly active visitors across their various websites, with the majority of them being millennials and gen z, but satisfying this audience isn't cheap.

They produce over 200 pieces of original content every single day across their websites and youtube channel. So while they were getting an insane number of views in aggregate, when you divide it by the sheer volume of content, they have to produce the unit economics aren't that great, despite their lack of profitability, silicon valley was enamored by their impressive audience growth. They raise. Hundreds of millions of dollars from venture capital firms as well as nbc, universal, it's almost as if they tried to burn this money as fast as possible, hiring many hundreds of new employees and expanding to 12 countries in 2017, just one year after raising 200 million dollars.

They were already running low on cash and were forced to lay off 100 workers in the us and 45 in the uk in 2018 they laid off 100 people from their french office and the pain was far from over. In 2019, they announced their largest layoffs, yet with 15 of their global staff, told to pack up their bags. For the last time, some news desks were almost completely wiped out with just one or two employees left in 2020. They completely shut down their local, uk and australia divisions as there was simply no path to profitability.

Jonah blamed the company's failure to turn a profit on their lack of scale. The thinking was that if they could merge with other digital media companies, they would be able to gain economies of scale and recognize synergies in their advertising platform. To do an acquisition you need either cash or equity. Buzzfeed didn't have a lot of excess cash sitting around to acquire competitors.

Also, none of the major digital media companies were publicly traded, so it was very difficult to accurately assess their valuations. That made it almost impossible to agree on terms for an all stock merger. So jonah perei decided that he would have to take buzzfeed public. In july of 2021, buzzfeed announced plans to merge with a spat called 890 5th avenue partners which would value the company at 1.5 billion dollars.

The spac had raised 288 million as equity to fund the deal, as well as 150 million dollars in convertible bonds. Importantly, they would use these funds to acquire complex media, a digital media company that also targets millennial and gen z, consumers. This, along with their recent acquisition of huffington post, should allow them to finally achieve the skill they need to reach profitability. At the time the stack market was still hot, despite their lack of profitability.

Buzzfeed represented the first opportunity for public market investors to own a piece of a pure play: digital media company. When the deal was announced, the spac price stayed pretty much flat at ten dollars. That means that investors thought the one and a half billion dollar valuation. For the company was reasonable, everything looked like it was going well.

Buzzfeed was about to raise 450 million dollars which they could use to further expand their empire. It's important to understand how a spak works. Let's say hypothetical spec raises 500 million dollars from investors. They identify a target company such as buzzfeed and merge with them effectively giving them the 500 million dollars in return.

The company would give this back investors, 50 million shares, which are worth 10 dollars apiece. Typically, they would also give about 20 of the shares to the spac sponsor as a fee for organizing it in total they have to issue 60 million shares. So, while this back price is ten dollars, the company is effectively only getting eight dollars and 33 cents per share that they issue, because they have to give some of them to the sponsor for free. However, right before the merger is executed, the investors have the option to redeem their shares.

That means they get their ten dollars back and don't receive any of the shares of their combined company. Let's say half of the investors decide to redeem their shares. The amount of money goes down from 500 million dollars to 250 million dollars. It's still ten dollars per share, so startup only has to give 25 million shares to the investors, but they still have to give 10 million shares to the sponsor.

In this case, the company is only getting 7.14 cents per share because a greater proportion of the shares are going to the sponsor for free. Basically, the more investors redeem their shares, the worse it is for the company in the early days of the spec mania. This wasn't so much of a problem with so much hype around spacks, very few investors redeemed their shares because they wanted to participate in the upside after the merger was closed. The buzzfeed merger was scheduled to close in december.

By this point. The spac market was largely melting down. Even previously successful specs, like virgin galactic, were more than 70 off their recent highs to make matters worse. In the days before the merger closed 60 buzzfeed news employees went on a strike to protest the low pay the company provides.

The minimum pay at buzzfeed is 50 000 per year, while that's a pretty good salary. In most places, many of the employees are in new york or san francisco, which have insanely high cost of living based on the spac valuation. Founder and ceo jonah pereira would have a net worth in excess of 100 million dollars, while many of his employees are barely scraping by the combination of the overall spac market melting down, as well as fears around the strike caused 94 of the investors to redeem their Shares that means that buzzfeed only got 16 million dollars for the transaction instead of the originally planned, 287 million buzzfeed share price immediately started to nosedive after the merger was finalized and to date it's been more than cut in half this example shows how disastrous spax can Be for investors who lack the foresight to redeem their shares when you do a traditional ipo, you have to pay fees to an investment bank, but at least you know how much money you will raise with a spec. It's all at the whim of market sentiment which can change on a dime.

So what does the future hold for buzzfeed now that they are a public company? It looks like the draconian layoffs that they enacted in 2019 are starting to bear fruit. While they still lose money in most quarters, they were able to make a 32 million profit in the fourth quarter of 2020, which is the seasonally strongest quarter in the most recent quarter. Their revenue grew by 20 compared to the prior year, and while they only raised 16 million dollars directly from the spac, they successfully raised 150 million dollars from a convertible bond offering which they used to acquire complex networks. So while the spac was a disaster, the company itself looks to be headed in the right direction.

Alright, guys that wraps it up for this video. What do you think about buzzfeed? Can they make a turnaround? Let us know in the comments section below, as always. Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.