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.
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:
Today marks the end of my love affair with aQuantive, a company I got to know working in ad sales over the years and a stock I learned to love over the years…
aQuantive got acquired recently by Microsoft in a $6B deal, making it one of the better performing stocks in my portfolio. Please note, for every hit like this, there are misses. In fact, I’ve been working on a post on my biggest trading/investing mistakes and there’s so much there that it’s taking a while.
I was not going to post the lot size, then decided to do so anyway as I want to share a few lessons (under the graph):
The lessons are:
- you need money to make money: 100 lots won’t cut it, and even 1000 don’t really make a dent. I sometimes contemplated putting $100K or more into the stock, but aQuantive was a company that was always priced at a high P/E and expectations were high… so it was arguably priced to perfection and I did not want to lose my shirt. I don’t regret not buying more, cause your thankful on the downside when losses are limited, but the bottom line: you need money to make money.
- stick to what you know: at the risk of coming across as too confident here, few people have as much knowledge in both finance and advertising online. That’s an area I should stick to (with proper diversification to limit exposure, of course).
- stick to quality companies: aQuantive was a best of breed firm in advertising services. I also owned Doubleclick, Valueclick etc. at various points, but aQuantive was the only one I would get back in… with more and more ferociousness.
- look for diversified plays within strong industries: aQuantive was a diversified online player, this made a lot of difference over the years, and of note, when MSFT bought it.
- allocate capital efficiently: I am selling my shares because MSFT is paying $66.50 and there’s no need to be greedy… at $66/share, it’s time to allocate capital to higher growth areas…
Also, while Mojo Supreme is picking up nicely on all fronts, the fact that I’m self financing Mojo Supreme means that every once in a while I have to unload some shares when they really spike… of course, that also supports the “allocating capital to higher growth areas” because I’ve long ago realized that as good of an investor as I strive to be, I am arguably a far better manager and entrepreneur. Don’t worry, a mistakes I’ve made as a manager is also on the way…
Of course, I think I’m ending my affair with AQNT as an investor, something tells me that as WatchMojo.com continues to grow, we’ll be working together for some time to come.
On the stock market front, there are certainly a few great opportunities I’ve had my eyes on. As always, I’ll add disclaimers when making posts on a given company I own or even think of owning.
:: “Why AQNT is worth 2x DCLK“ - 2007
:: “AQNT: I told you so. Maybe You Should Listen to Me?” - Feb. 2007
:: “AQNT: I am telling you, Listen To Me! - Nov. 2006
On May 30th I commented that aQuantive was sitting at $5B, even though MSFT had agreed to pay $6B for the company.
Per share, MSFT agreed to pay $66.50 (an 85% premium) even though as recently as May 30th, the stock was only at $63.75.
Today - July 6th - marks the end of the anti-trust period where if anyone had an objection, they could raise it. The deal cleared that hurdle today. As a result, AQNT is up $1 because all that remains is a vote by AQNT’s board, and unless they suddenly grow an aversion to being stinking rich, they will approve.
The discrepancy of $1B in the market cap of AQNT after the deal was announced and when the deal will close was due to uncertainty about whether or not the feds would approve it. Sure, while DCLK/GOOG combines two advertising leaders, in this MSFT is buying something new in a business it’s not in. The antitrust issue is and was, somewhat moot.
That is why I did not think the market was pricing this correctly, of course, the market is usually right.
Regardless, most people knew that this one would not backfire and the feds would not object, as such, if anyone had money sitting around, they could have bought a bundle of shares and make an almost riskless profit (arbitrage) and I suspect many did. There is, after all, an entire subset of the investment community that partakes in merger arbitrage, and this was one of the more obvious, riskless opportunities.
If you would have spent $10M and bought roughly 150,000 shares, you could have made $415,000 in profit in a couple of months ($66.50-$63.75 x 150,000). That’s not bad at all.
Someone should really hand me a billion dollars to manage.
Disclaimer: I own shares in MSFT. This should not in any way be construed as investment advice, is for entertainment purposes only.
Some interesting tidbits:
FRESH OFF A DEAL TO sell his agency to Microsoft Corp. for $6 billion, all eyes were focused yesterday on aQuantive president and CEO Brian McAndrews, the digital adman of the hour.
(…)
Microsoft would give aQuantive the chance to accelerate its vision with an infusion of financial capital and technical resources.
“The key difference between digital and traditional media is technology,” he said. “We are aligning with the largest technology company in the world.”
While predicting that consolidation in the industry will continue, McAndrews said that doesn’t mean an end to the scrappy innovators.
“We’re in the first or second inning of a long game here. There’s no monopoly on innovation,” he said.
(…)
Aligning with Microsoft will give aQuantive immediate access to resources it would otherwise have had to acquire independently–such as Massive, the in-game advertising experts, and ScreenTonic, the mobile marketing firm.
While Atlas and DrivePM are more technology-oriented parts of the business, Avenue A|Razorfish will remain the most independent and least affected unit when the deal closes later this year, McAndrews said.
One obvious advantage Microsoft brings is immediate global scale, McAndrews said. “We are in the seven largest countries. We want to be in more.”
(…)
“We’ve put creatives and media planners side by side with software developers and the statisticians,” McAndrews said. “They get along. It’s hard, but it’s more easily done with a best-of-breed model.”
As for the blurring line between advertising agencies and technology companies, “it’s been blurring for years,” McAndrews said. “That is the agency of the future. When all media are digital, we’re all digital agencies.”
A former ABC television executive, McAndrews also said he sees TV becoming more like the Internet than the other way around.
“Distribution can trump destination,” he said. “I need to go where the audience is.”
Evolving formats and accountability are the other two inevitable trends.
The Microsoft deal felt like more of a fit, McAndrews said, in part because of the familiarity aQuantive had with many of the Microsoft team through previous business dealings and by being co-residents of Seattle.
In an interview after his official Q&A, McAndrews said aQuantive is continuing to look at acquisition opportunities–particularly in the international agency side.
As for the conflict of interest issue, with Microsoft both a buyer and seller, McAndrews said it’s no different than aQuantive’s existing experience operating Atlas and DrivePM along with Avenue A|Razorfish.
“We keep the businesses separate,” he said.
McAndrews anticipates no antitrust hurdles for the deal because aQuantive is strong in areas where Microsoft is weak, and vice versa. “We don’t have a search engine. Microsoft does. Atlas is a leader in video on demand. Microsoft has complementary IPTV. “
As for Google/DoubleClick, he said, it’s a completely different story. “But it will be up to the government to decide.”
Courtesy of MediaPost. Love that last line, already towing the company line… I own shares in AQNT and am always looking for the next 85% premium takeover target.
Yesterday, it was reported that the FTC was going to investigate into potential anti-trust issues in the Google/Doubleclick deal.
That puppy was for a whopping $3.1B, and triggered a plethora of deals, including Yahoo!/Right Media ($800M valuation), WPP/24/7 RealMedia for $680M and MSFT/aQuantive for $6B.
But this begs the question, in a market that is strong-form efficient (all info be it public or private is reflected in stock), can the stock market give a quantifiable probablity that a deal won’t go through?
The Google/DCLK and YHOO/Right Media deals involve private firms, so the answer there is no.
But WPP/TFSM and MSFT/AQNT involve public companies so let’s examine this:
The latter, an all-cash deal, was for $66.50 per share, yet today, the stock is still only at $63.75, or 4.1% off the purchase price. In terms of market cap, AQNT is at $5.03B though the price tag was $6B. That would suggest one can make a 19.28% return… (note: don’t do this! I am not an investment professional and I am sure there is something I am missing, hence why I’m posting this, to find out).
It’s not like the difference is cash, since AQNT has $296M (according to Yahoo! Finance). It also has $80M in debt, so a net cash of $216M. Clearly, this does not explain why the market is hitherto valuing AQNT at $5.03B when MSFT is eager to give shareholders $6B.
Alternatively, it’s worth noting that TFSM is at $11.72 and the buyout price is for $11.75… not much room for arbitrage there. Then again, the market cap is at $598M though the price WPP is to pay is $649M. That’s off by 8%, or $51M, but TFSM has $62M in cash, and $15M in debt… so $47M net, so maybe it’s that?
Is that the transaction costs? Maybe. But who pays for that: buyer or seller. I guess it depends.
Or, maybe the market is saying that there is a probablity that the deal won’t go through?
I don’t - in all honesty - know why, but it’s interesting. If someone knows, please chime in in the comments or email me at ash@mojosupreme.com.
UPDATE #1: From Howard Lindzon, investor and entrepreneur:
“Just merger arb guys betting on the deal and that’s the risk spread the big big money is taking. In the AQNT deal the big money says that there is a bigger chance this deal could get changed.”
I’ll post as people send me their two cents.
There’s been a lot of talk about the steep premium MSFT paid to acquire AQNT, and there are many reasons for that, one being that in the ad networks marketplace, it had become a seller’s market, quickly, after DCLK sold to GOOG for $3.1B.
But in light of the bidding war between MSFT and GOOG for DCLK, I’m not surprised at all that AQNT fetched that much (I own shares in AQNT). I gave my two cents as to why “AQNT is absolutely worth 2 times DCLK” here. Of course, anyone’s guess is as good as mine. Today, TheStreet.com joins the camp of supporters who are bullish on the deal.
But ultimately, I think that they paid so much because a) AQNT was the jewel in the online ad crown in its segment and b) there were other suitors. Whether Google was one of the companies, I’m not sure. If it was, it was a defensive move. And if Google was interested, then MSFT wanted to show Google that goodwill, positive press and user euphoria notwithstanding, MSFT had the financial firepower to beat Google in the one area that in some ways counts: at the cash register.
Google is making a lot of money, we’re talking $3B in profits on $10B in revenues in 2006. But it has $10B in cash, and parting with $3.1B for DCLK. Even if it wanted to buy AQNT, it could not have spent $6B out of a remaining $7B on them.
This deal, besides getting MSFT into the red-hot online advertising space in a major way puts Google on the defensive in a few ways.
This is also why, you saw yesterday talk of a Google/Salesforce partnership. In the past, I had suggested Google could launch a Salesforce killer just by bundling some of its features. But the fact that Google is partnering with CRM and not launching a competitor or buying them shows the limits of Google’s capabilities.
I posted this earlier as Update #3 in my earlier post on MSFT/AQNT, but reposting cause it looks fishy.
What’s that massive volume spike for AQNT at the end of the trading day yesterday? Did someone have a scoop and scoop in before the market close and buy a lot of shares? Average volume for the stock was in the 50,000 shares each hour, then right before market close, a massive, and I mean massive spike to 2.5M shares?
What time was the deal officially announced? Right before market close yesterday? I doubt it, the MSFT press release says May 18th, zat is today, no?
In 2003, I began to buy shares in DCLK, VCLK, AQNT, Fastclick, etc. [Fastclick was bought by VCLK, eventually].
If it was in online ads, I was long. Over the years, I sold most of these shares because the stocks rose from high single digits to $20 or so. The one company I bought back every single time was AQNT. Today was the jackpot for AQNT founders when MSFT paid $66.50 a share or an 85% premium.
Matt Ingram asks is AQNT worth 2 times DCLK? Yes, I told him. He asked why? Others simply asked who is AQNT? Kevin Kelleher outright thinks MSFT is “bat-shit insane.”
So here’s my answer and my two cents on why AQNT is worth 2 x DCLK, in my humble opinion.
For one, I don’t think DCLK was worth $3.1B, but if DCLK went for $3.1B, then I can see AQNT being worth 2 x that. Yes, crazy talk. Welcome back to the crazy times.
DCLK is a software company whose upside is limited to a) the number of contracts it has secured and b) the number of impressions it serves. Indeed, on Google’s grid, these numbers - particularly b) - can grow quite a bit. But when a lot of people said Google just hit a home run in online advertising by buying DCLK, they were wrong because saying DCLK is an online advertising play is akin to saying MSFT is strong with ad agencies because ad agencies use powerpoint in their client pitches. DCLK sold all of its media assets to L90/MaxOnline when ad rates were low and no one really paid CPM rates, and got into software only.
AQNT, on the other hand, has technology, services and media assets. It is definitely the most diversified online advertising firm. MSFT’s own Don Dodge lists AQNT’s assets, which include:
MSFT now is an advertising company. Well, it’s an advertising and software company. The $6B price was the cost of entry. If it would have bought DCLK, it would have been an even bigger software company. TFSM would have been a second or third tier ad network, but AQNT is a top tier advertising company. I have told everyone and anyone to buy AQNT, as I did here, twice:
:: “AQNT: I told you so. Maybe You Should Listen to Me?” - Feb. 2007
:: “AQNT: I am telling you, Listen To Me! - Nov. 2006
- MSFT can now build world-class sites (AQNT bought Razorfish).
- MSFT can now plan, buy and create ads (AQNT owns Avenue A’s agency, which is the agency for hundreds of F500 advertisers).
- MSFT can now do so much more with email marketing.
- MSFT’s adCenter just became relevant, since Atlas DMT is DCLK on steroids and miles ahead of Dart for Advertisers.
That’s just online, on MSN.com, it can now offer advertisers a bit more than AOL can, and a lot more than Yahoo! can. In other words, this deal will help MSN catch up to Yahoo!
More importantly, MSFT just skimmed the top of the market, and not the bottom where ad networks like TFSM serve. DCLK also is a contract’s out clause away from losing a client. But AQNT is a relationship-based company and even if MSFT owns them, I don’t see many clients taking their business away because AQNT is a best-of-breed online advertising company, and by buying them, so is MSFT now as well.
Admittedly, it’s now an execution and integration risk management case…
Today those who listened made a tidy sum. This is actually very accretive to MSFT despite the $6B sale. Frankly, paying cash was smart because cash does not command much of a multiple, but this deal will command quite a multiple. And AQNT’s business - in 2006 AQNT reported net income of $53.9 million on revenue of $442 million - means that there’s enough there to start moving MSFT’s P/E AND P/S from a software multiple to an ad multiple. I know, MSFT makes $40B in revenue a year, so that’s only 1%, but MSN.com accounts for 1% and this just might be a case where 1+1= a lot more than 2.
This might be as smart as Time Warner’s Advertising.com deal, which today is hailed as genius and we put in our Top 10 Web Deals of All Time here.
UPDATE #1:
Paul Kedrosky points out that another blogger worked out the price paid per impression and this is twice as rich, it should be, because AQNT is no TFSM. AQNT is really the gold standard of online advertising. It is certainly worth $0.02 per impression if others fetched $0.01. But I would like to stress that while GOOG bought DCLK’s ad serving business, which is indeed a commodity and where revenue and price per impression matters, with AQNT, revenue and price per impression matters a lot less. In other words, the value driver for AQNT is not the quantity of advertising impressions but rather, the quality, and MSFT got the best online ad business.
UPDATE #2:
Another thing that was genius about AQNT’s strategy was that it spent 2006 buying up assets and becoming a more global play.
In 2006, AQNT Acquires a bevy of firms including Franchise Gator, a performance media company; Amnesia, an Australian interactive ad firm; Neue Digitale, a German interactive ad firm; and eCrusade, a Hong-Kong interactive ad firm. Aquantive also buys Accipiter Solutions, an ad-serving technology company.
This made AQNT a much sought after asset and trust me, $6B is a lot of money, but when you have $35B in cash, the mere risk of seeing someone else come into your backyard (Seattle, that is) and scoop up the crown jewel is reason enough to pay a hefty premium. In other words, not only were multiples lower last year, but devoid of deals like DCLK, TFSM, no way could have AQNT struck this deal, or anything near it… but biding its time, it scooped up assets, completed the crown, become the jewel itself and today struck gold.
Dang it’s a great time to be a Web entrepreneur…
UPDATE #3:
What’s that massive volume spike for AQNT at the end of the trading day yesterday? Did someone have a scoop and scoop in before the market close and buy a lot of shares? Average volume for the stock was in the 50,000 shares each hour, then right before market close, a massive, and I mean massive spike to 2.5M shares?
I don’t know, but it looks suspicious.
Some figures from TheStreet.com article:
ValueClick rallied mostly on speculation that the aQuantive deal — which featured a stunning 83% premium to Thursday’s prices — makes ValueClick the most likely online media player to be acquired.
But because of the dynamics of the scorching-hot online advertising business, ValueClick stands to be a winner even if a bid doesn’t emerge soon. That’s because online advertisers will value its independence from the likes of Microsoft and Google.
Microsoft’s surprise $66.50-a-share bid for Seattle-based aQuantive, unveiled earlier Friday, extends the merger frenzy that has recently hit the online ad space.
A deal by Microsoft was expected ever since it lost out to Google in a bidding for privately held DoubleClick in April. But the circumstances of the transaction raise some interesting considerations for investors.
First, the size of the deal and the rich valuation Microsoft was willing to pay signal just how competitive the bidding process was. The $6 billion cash transaction values aQuantive at 86 times 2007 consensus estimates, points out S&P analyst Scott Kessler.
Just a sign of the times…
PLAY
