The Grinch Who Stole Q1
Tech Crunch has been making the rounds and the projections for Q1 2009 online advertising are bleak:
Display advertising revenue is going to fall of a cliff in January according to a number of content sites I’ve spoken with who rely on advertising for revenue. “Sales through December were mostly strong as advertisers used up their marketing budgets,” said one sales exec. But, he added, “there are few buyers for this next fiscal quarter, and those few that are buying are looking for steep discounts.”
Just how bad will it be? I’ve heard estimates of 30%-80% revenue drops over the next three months from companies that serve a variety of content (games sites, tech news, celebrity news, political news, etc.). The median pessimism point is around 50%. The people I’ve spoken with work at large public companies and small one-person blog shops. Absolutely no one I spoke with said they expect an up quarter.
Negativity Begets Negativity
At some point (and we’ve passed that point, folks), the bad news becomes a multiplier effect for more bad news:
- a media buyer sees this kind of article, uses it to lowball a publisher,
- the publisher sees little bright news, so they give in,
- the rates fall downwards, the bookings become rarer and rarer,
- next thing you know, indeed, we’re in a down quarter.
D stands for Deflation…
The web economy and online advertising sectors represent tiny pieces of the bigger picture. The buzz word in 2009 will go from subprime to deflation… so if we operate in a climate (or think that we do) of falling prices, then I wonder why we’re shocked to realize that ad rates and overall ad revenue might fall. I think at the macro level (all marketing) this might - and will - happen. From AdAge, via MediaMemo:
… and Display Advertising!
But as we outlined in our 2009: The Year in Online Advertising, yes, display will be weak, but I think publishers are buying into the glass-is-half-empty outlook because of bearish reporting. The truth is, my gut says things will go down a bit differently:
- marketers will push for video ads (and rich media ads in general) in display advertising real estate,
- the definition for video advertising will move away from purely instream ads (pre-rolls or overlays, for example) to include in-banner video ads,
and by mid-year, the actual display advertising figures will be fine (when you include the video / rich media units).
I do agree that traditional display ads will be weak… mainly due to a horrible Q1.
Let’s be honest: CPA and CPC are for suckers
While many are using the downturn to suggest that performance-based advertising units will see a boom, I’d like to point out a truth that most publishers fear admitting: CPA and CPC ads don’t really work for publishers, so even in horrible CPM times, I don’t think you will see a boom in performance priced ads in a downturn. For more on the entire CPC, CPA and CPM and other online ad terms, click here.
CPA and CPC revenue does not pay the bills, and quality publishers generally reject giving up prime real estate to CPC and CPA inventory.
But don’t take this from me, just follow the market: why else do you think Doubleclick, Blue Lithium, aQuantive and Right Media all got bought out (they all pay out largely in CPM terms even if on the back end they arbitrage inventory on a performance basis) whereas Valueclick remains standing, with no one to partner up with. At its peak, Valueclick was worth $3B with talks that it could fetch more. Even before the market meltdown, it was trading at $1B. Today, in the post media meltdown market, it is trading at $562M in market cap, with an enterprise value of $460M. The point being: in my experience dealing with of all the ad networks, from the publisher’s perspective, Valueclick was the most exposed to CPC and CPA and thus, most expendable.
Now this is all just my gut, but my gut has been right before: here’s one example of CBS buying CNET.
All Things Are Relative: At Least We’re Not in Radio, TV or Print!
If online advertising sentiment is this bad, even if the outcome is half as bad, then imagine what the radio, TV or print outlook is right now. Can you really imagine a media buyer paying $1M - let alone $50M, as Dell balked at - to be in print? What about radio or TV, which represent a black box in advertising where you don’t get to even track or target anything?
Newspapers like NYT and Tribune are - or are at risk to - defaulting right and left. TV companies like CBS are seeing declines in revenues. Radio companies are not faring better.
The point I am making is: there is a bull market somewhere at all times - even these times - and that market is online. It’s time to balance the reporting, too. I find it appalling (alright, strong word) that a site like Tech Crunch inflated the bubble on the way up, and is now ringing the bells of doom in the downturn… but that is publishing… and Tech Crunch does it well.
Who does the doomsday scenario thing best? Henry Blodget. Reading his Alley Insider, you’d think he and his talented staff of writers were typing on a ledge somewhere, choosing between the Publish button and jumping out of the window. For a great piece on his comeback, read this Wired piece. Mind you, in all honesty, I am technically guilty of this as well, the title of this piece should be “Will Online Ads Fall by 50%”, and not “What Happens if Online Ad Revenue Falls by 50% in Q1?” - but when I started writing it, I was thinking more of the impact on print… but then I started to ask myself, can this even really happen?
Well, maybe. At the end of the day, we just saw a major evaporation of wealth throughout 2008 in the housing, financial and automotive sector, to think that online advertising will go on unscathed is foolish, but to alternatively expect a 50% decline in what is the only bright spot in all of marketing is equally foolish.
At one point or another in the past few years, I’d owned shares of:
- aQuantive (acquired by MSFT for $6B)
- 247/RealMedia (acquired by WPP for $649M)
- Doubleclick (taken private for $1.1B - then acquired by Google for $3.1B)
- Fast Click (acquired by Valueclick)
Had Blue Lithium ever gone public, I would have bought up shares, too. As a former advertising and current new media executive, I knew all of those companies’ products and managers and knew which ones were valuable and which ones were not.
One company I’d never owned remained Valueclick. I frequently thought of getting in the shares - because sometimes market peers move up and down together - but for whatever reason, I’d stay on the sidelines. That’s the advice that UBS’s analyst is doling out today:
“Without confidence in our ability to call a bottom to how low revenue growth can fall, we remain on the sidelines and reiterate our neutral rating,” analyst Benjamin Schachter wrote in a note to clients, cutting his price target on ValueClick’s stock to $13 from $20.
I recall thinking of buying when this stock was in the low teens, or $1B, and then seeing it go all the way up to the low $30s, or $3B in market cap. By then, the music began to slow down, all of Valueclick’s competitors had found a dancing partner.
Then the music stopped: online networks became so passe, media companies began to launch networks themselves… and before you knew it, Valueclick’s opening had vanishes.
I have no clue if Valueclick will slide further down the spiral or find some room to appreciate. All I know is that Valueclick was overvalued and overhyped at $3B. But what at $1B? I just don’t know. But much the same way that some of the better deals are done in a cool market climate… and let’s face it: we’re in a cool climate now. Oh, and by cool, I mean sucky.
The following is a perpetual-work-in-progress. Once you start to compile a list of mergers and acquisitions, you realize why it’s nearly impossible to have a complete list. We are quite confident that the following is a very good, comprehensive list of the largest, more notable deals… but it is not - and no list will be - fully complete because there are too many countries around the world and too many industries to report (it is highly possible that the Wall Street Journal or Financial Post, for example, has such a list… but it would be thick and unwieldy).
We have included:
- many industries
- have not adjusted for inflation
- mergers (be it all cash, cash/stock, or all stock)
- acquisitions (we have excluded partial acquisitions)
- private equity deals.
It is certainly not complete, send me any ones you think I am missing or industries you want us to add next to ash@mojosupreme.com or leave in the comments.
Trivia:
- In 1981, when DuPont acquired Conoco for $7.8B, it was the biggest deal of all time. But adjusted for inflation, that remains a $20B deal by 2008 standards.
- KKR’s private equity deal for KKR remains the biggest buyout when adjusted for inflation, but in actual dollars it has been long surpassed.
Related on HipMojo.com:
Just because the tide is rising, does not mean all boats will rise.
Valueclick rose quite a bit in the euphoria surrounding online ad networks, to $35/share. I was so close to shorting the darn thing, because anyone who knew the market well knew that VCLK’s business was very different to that of 24/7 Realmedia, aQuantive or Doubleclick. The company’s stock fell back to $25 since rumors calmed down… and today, after announcing its latest results (22% spike in earnings) and cutting 2007 guidance, the company’s shares are down another 20%.
Be careful not to get caught up in the hype when it comes to M&A and investing. And, anytime a company grows considerably via M&A over a period of quarters and years, it is bound to experience some hiccups along the way. I’m not sure yet if this is a hiccup or a sign of slowing business fundamentals. As the company’s market cap now sits at $1.99B, this puppy is getting back on my radar, but it will take a lot more to get me to dive back in to the stock.
Disclaimer: I owned VCLK in the past, but not at the time of this post.
After a 8% spike on Friday - fuelled by MSFT paying an 85% premium for AQNT - today Valueclick rose an additional 11%. I owned this stock (and others in the space) in the past and sold it when it first doubled from $1o to $20. I saw a strong momentum in digital advertising stocks again, but focused on so-called best of breed players and doubled up on AQNT. This paid off quite well on Friday.
It doesn’t take a genius to figure out, that like TFSM and AQNT, VCLK will benefit from M&A hype. Of course, both TFSM and AQNT did sell eventually. I did not buy TFSM again, having made a nice return in the past, I also did not buy VCLK this time around… and at a $3.3B market cap, I probably won’t.
I might be proven wrong on this (won’t be the first time; DCLK/GOOG), but I don’t see VCLK selling as a slam dunk.
First, there’s the FTC inquiry clouding one third of its business. Then, there’s a little detail about VCLK. Unlike AQNT, I don’t know who really uses VCLK!
Will VCLK sell too?
I don’t know. I don’t know if it would sell, and I don’t know, frankly, who uses VCLK.
A story on TheStreet quotes an analyst on Think Equity as saying “VCLK is attractive because it has technology,” indeed, but I don’t know many publishers or advertisers who use it. Its ad serving platform, Mediaplex, might have been used by 1 out of, what a million potential business users, whereas everyone seemed to use DCLK or AQNT.
Listen, I’m sure many people use VCLK, I can read a financial statement, they make money and all, but unlike DCLK or AQNT, VCLK just never seemed to be the must-have stock in the sector within one’s portfolio, that was AQNT.
In my experience in ad sales, I recall VCLK as being one of those companies that was in the space but you never knew what it did. Here’s a rundown of its solutions. It made a plethora of M&A deals, including one for Commission Junction, and last year alone it saw its stock double largely based on acquisitions’ contributing to the top and bottom line.
Is VCLK complementary to AQNT? Sure, why not. Aren’t most things online? But after paying $6B for AQNT, I hope MSFT does not waste $4-5B (VCLK is now at $3.3B - up 100% since last year!^#$#) on a second/third tier advertising network and focus on what it needs to do which is a traffic boost in general and search queries in particular.
Facebook - who says wants to remain solo - could sell for $5-8B - so instead of paying anything near $5B for VCLK, MSFT might as well just make Mark Zuckerberg an aQuantive-esque offer and get the hottest company around.
[Before you blast me, I don’t think Facebook is worth $5-8B, but since when has value been one and the same as price? Last Fall, using figures on the size of social networking advertising, my analysis put Facebook at $2.35B in 2010, and of course, the recent slate of M&A deals, Facebook’s forays and growth trajectory have made that look so unrealistic and conservativee, since price is in fact what someone will pay for something, and not what yours truly, or any analyst says something is worth].
Then again, there are so many takers for all things digital that I would not be surprised seeing someone walk in and make VCLK an offer they can’t refuse, but before diving in at these prices, note not all stocks end up fetching a market leader premium as AQNT did, when TFSM sold to WPP, it sold for pennies more than what they stock was trading at because it had already run up quite a bit in the weeks and months leading up to it, and with the FTC cloud remaining an issue, this is one stock that is more than fully priced and more risky than the potential reward offers, in our humble opinion.
Disclaimer: of companies mentioned above, I’ve owned them all at one point but currently only own AQNT.
My biggest fear, all right, that’s an outright lie.
Let’s try again: something that worries me is seeing another bubble creep up. Frankly, I was one of the rare types that benefitted from the bubble. Not quite like Google did… obviously, but as our competitors faltered it created an opening for my old company. Translation, my old company exited for $13.5M in 2005 after launching in 2000 while our largest competitor rose $17M in financing in 1999 and shut down in 2000. That being said, as a web entrepreneur now, no one wants to see things pop.
That’s why I am happy - even as a shareholder in public securities - when the stock market shows caution.
Valueclick announced its quarterly figures: earnings rose 90% off a 34% spike in revenues. It’s a stock I bought ages ago in the high single digits and sold in the high teens (not sweet). But I own many in its peer group (aQuantive, for one) so I like to see it do it. 90% spike in profits? 34% spike in revenues? That’s pretty sweet.
What happens? Stock falls $2 the next day.
Sure, the stock has risen quite a bit and it only narrowed guidance and not up it:
The company narrowed the range of its 2007 sales guidance to a range of $655 million to $665 million, from $645 million to $665 million.
I’m telling you, public investors are extremely rational and so-not-exuberant… it’s the private market that is crazy.
PLAY
