Mondays are always hectic, so hectic that I sometimes fail to check out the news related to the stocks in my portfolio. The only rule I try to adhere to is the following: make sure you know which one of the stocks in your portfolio is set to announce quarterly earnings. That way, if the stock has risen a good amount, no matter how well it might have fared, it’s always a good time to sell, since expectations might be so high for the stock that no results could meet investor expectations, that happened to one of my favorite stocks, Digital River, this past week.
Conversely, if a stock’s performance in the past quarter has been ho-hum and you know it might have done real well, it might be the best time to buy the stock. I know, that is a bit manic, but like I say: my form of gambling excludes the casino and even sports wagering, and is limited to the stock market. It’s my coke (no, don’t do that either).
Today was one of those manic Mondays. I just got news that a major development initiative at Mojo Supreme was completed. What’s that? You will have to wait a day or two (ok, maybe a week, tops) to find out. But let’s just say it’s a big one.
But enough shameless promotion here… we are trying to give you investors some input as to what a potential Valueclick / aQuantive merger - as reported today in a few places like TheStreet and WSJ - would mean.
Note that each company is worth about $1.7 billion. Both have doubled in the past 12-24 months. For the precise timeframe, go to Yahoo! charts.
First off, as always, some disclosure: I own aQuantive shares. I bought them at about $8 and sold them all at $20… and then when it went south of $15, bought plenty again and have held on to them for a while. The truth is that I am very bullish on aQuantive. I believe it is the best positioned services company online. Yahoo! is the best positioned media company (I also own Yahoo!)
I used to own Valueclick. I bought Valueclick ages ago and sold it after it bought Fastclick. I had bought Fastclick a few months after its uneventful IPO (before it sold to Valueclick) knowing that another network would buy it. Why, because it would make sense for one network like Valueclick to get more market share by buying another one. When that sale happened, I made a decent return on Fastclick, and not being a greedy person, I decided to sell my holdings of Valueclick as well. Valueclick has gone up a bit since I sold, but not enough to create any sleepless nights.
Today, I would occasionally check my portolfio only to see that aQuantive was down over $1 per share. I figured investors were expecting bad news, as it was standing on deck to report earnings. This made no sense to me, since Q1 is usually good for online ad agencies. Here’s why:
Everyone knows that advertisers spend a lot of money in Q4. But what happens is that Q4 is always cut short due to Christmas, Hanukkah, Kwanza, and New Year’s. As such, a lot of the money that was supposed to be booked, delivered and billed in Q4 gets slipped onto Q1 of the ensuing year. But since investors are a bunch of impatient, unreasonable people, their expectations for Q4 are oftentimes not met, whereas that shift of ad dollars from Q4 to Q1 means that Q1 is usually pleasantly suprising.
Judging by the after close market reaction - aQuantive is up $1-2 - I guess I was right.
So, I guess the reason why the stock was down before the close had nothing to do with the company’s expected results, but rather, by the fact that despite rumors, aQuantive and Valueclick would not merge.
Rumors? I wasn’t even aware of such rumors…
Would such a merger be beneficial?
Honestly, yes and no. It would be good because aQuantive is a high end ad agency, including Razorfish’s business it won over in the $160 acquisition of SBI (who had itself bought Razorfish for a paltry $7 million). You are a Fortune 500 company and want to get online? Call aQuantive.
Valueclick on the other hand is at a low hanging fruit kind of ad network. You want to advertise Smiley Central on a billion pages? Call Valueclick.
So while such a merger would mean that the new combined entity would be able to offer clients everything they could possibly need, I actually think that few clients want everything between A and Z. By merging, the two companies would slow down a bit, and not accelerate at all. In fact, I think that each company is great and could one day be worth $3+ billion. Combine the two and I do not think you necesssarily get a $3.5 billion company though.
Also, this would not make sense for there would be some cannibalisation.
Here’s the rationale: if Procter & Gamble wants to advertise online, it might take:
- 20% of the total and spend it on search marketing. There, Valueclick would not get any revenue but aQuantive’s search division might get some. The search division acts as an agency doing the strategy, buying etc. The bulk of that 20% would go to a Google, Yahoo! who generates the search queries and volume, and not aQuantive.
- it might take another 20% and invest it into the development of a cool website. Again, Valueclick gets nothing there and aQuantive does, since its Razorfish division does that kind of thing for many of the top brands out there.
- it will also take 15% of its overall ad budget and place it through big networks, to get “reach.” There, Valueclick would get a good chuck of the buy, and aQuantive would probably not. Of course, the truth is that aQuantive’s Avenue A - for example, I do not think Avenue A is the agency of P&G - might act as the agency and be the one doing the buy… conclusion, even if it does not get the revenue in one way, it does touch revenue by doing the buying (unless P&G wants to buy in-house or give the buy to another agency).
As this example shows, the value of such a merger goes to clients (P&G, Smiley Central, etc), which in theory is great, but in a high growth sector like online advertising, the simple truth is that ValueClick + aQuantive are worth more to investors separately than combined. Buy them separately, but combined, I would probably sell the day after the announcement, no matter what the upside might be. I’d rather buy a lean, small competitor that a Siamese Twin. Of course, I could be wrong. I am not Warren Buffett….
But, my two cents is simple: only when growth slows down would it make sense to bring two companies like that together. After all, it’s not like the companies can merge to cut staff and grow margins in that way. I’d assume that both companies are looking to grow aggressively in terms of headcount.
When I was a bright-eyed kid in business school, I blindly assumed that mergers in media made sense. We saw AOL and Time Warner hook up… as an online publishing executive, I saw many mergers implode. I was even part of a couple in 2005, and thus far at least, when it comes to the Web and mergers: small is beautiful; big is clunky.
Of course, that’s just me.
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