Over the last few days, much commentary has been offered on how Sony's acquisition of Bertelsmann's half of Sony BMG can be used as a measuring stick for other music companies. That's a low-tech way of saying people are comparing multiples and valuing companies.

From the Times Online:

The warring parties could not even agree on the valuation of Sony BMG, the world’s second-largest music company, with Sony indicating that the business was worth $1.8 billion (£920 million) and Bertelsmann preferring a figure of $2.4 billion.

The valuation implied in the deal is $1.8 billion, not $2.4 billion (which is twice the $1.2 billion paid by Sony), because Sony already had a right to half the joint venture's $600 million in cash.

Applying WMG's current price/sales ratio to Sony BMG, wrote Alley Insider's Peter Kafka, values Sony BMG at only $1.3 billion. That's a pessimistic, but not totally unreasonable, look at it. But since cash is king, let's look at earnings rather than sales. The Times Online's Dan Sabbagh wrote that Sony valued the company at 4.7 times underlying earnings. That doesn't look to be way off if you take WMG, with its music publishing, trades at 7 times EBITDA. The difference is that Sony BMG does not have music publishing, which commands a higher multiple that does recorded music. Both, by the way, are way, way lower than the 18.6 times earnings Terra Firma paid for EMI.

Sony's acquisition price "has negative implications for music industry valuations, specifically Warner Music," says Pali Research's Richard Greenfield (quoted in this Financial Times article).

This was even a conversation item during this mornings Warner Music Group conference call. WMG's Edgar Bronfman said that from WMG's knowledge of the transaction, the analysis done and the resulting multiples are "well below" the actual multiples paid and if they were correct they ague for an improved valuation of WMG. That's optimism for you.

A problem with all this is there was only one bidder for Bertelsmann's half of Sony BMG. That, and the lack of publishing, messes with any attempt to apply similar ratios to other music companies. What is clear is the market thinks far more of publishing than recorded music. Publishing has growth in it. Recorded music does not.

I'm sure Sony feels it can turn around its recorded music division and may have a better idea than the market as to how it is going to do that. Or it believes it can take better advantage of intra-company synergies...even though it had four years to capture synergies and watched its market share fall. Or, more likely, Sony has more patience than do investors. It's clear the market does not have a clear window into WMG's or Sony's vision for profit growth. There's just too little certainly if and when it will happen. Whatever is going to turn recorded music around -- if it happens -- is just barely on the horizon. But if there is growth ahead -- organization overhaul, revenue from performance royalties, successful new subscription models, the superior margins of digital, a combination of all of the above -- then maybe Sony got a good deal on Bertelsmann's half of Sony BMG. And there's nothing wrong with buying low.

[music jobs] New York University is seeking a Department Chair for The Clive Davis Department of Recorded Music.