I probably unloaded more shares in Q3 2006 than at any other point in my life. I had to offset some gains I had realized earlier this year to avoid a large tax bill. I also have to fund the growth of our company so I thought the timing was right to unload some of the companies I had owned for a while.
Two companies I unloaded (somewhat reluctantly) were Valueclick and 24/7 RealMedia. As feisty competitors in the online advertising industry, I expected both to continue their upward progression, but today both companies released quarterly reports and while Valueclick seemed to surpass expectations and as such, is up in after-hour trading, 24/7 RealMedia swung to a loss and is down.
This got me thinking into their values as potential M&A targets, and look at privately held companies in the space.
Some interesting stats from the reports:
24/7 Realmedia:
- Unlike the most recent quarter, last year’s results did not expense stock options. Excluding items and stock options costs, the company earned $4.7 million, or 9 cents per share, compared with last year’s adjusted earnings of $2.3 million, or 5 cents per share, during the year-ago period.
- Revenue jumped 40 percent to $49.1 million from last year’s $35.1 million.
- The company said its international operations contributed 61 percent of sales for the quarter, fueled by strong growth in Britain and South Korea. 24/7 also said it is extending its existing search engine marketing partnership with Tokyo-based advertising conglomerate Dentsu Inc. “to address strategic Asian markets outside of Japan,” including China, India, South Korea and Taiwan.
- The company expects fourth-quarter earnings between a penny to 2 cents per share, adjusted earnings between 11 cents and 12 cents per share, and sales in the range of $55 million to $59 million. Analysts are looking for earnings of 12 cents per share on sales of $57.6 million.
As of this writing, the shares are down 9% after-hours.
Valueclick:
- 37% year-over-year organic revenue growth.
- Revenue for the third quarter of 2006 was a record $137.9 million, well above the high-end of the Company’s previously issued guidance and a 69 percent increase from the third quarter of 2005. Third quarter 2006 results include a full quarter of operations from Fastclick, acquired on September 29, 2005.
- Net income for the third quarter of 2006 was $16.8 million, or $0.17 per diluted common share, compared to $11.0 million, or $0.13 per diluted common share, for the third quarter of 2005.
- The consolidated balance sheet as of September 30, 2006 includes $230 million in cash, cash equivalents and marketable securities, $595 million in total stockholders’ equity and no long-term debt.
- More importantly, the company upped its guidance for the year, and as such, the stock is up 3% in after hours trading.
Accounting for the post hours trading, 24/7 boasts a market cap of $436M while Valueclick weighs in at $1.9B.
More importantly, as the market consolidates, I see Valueclick as an acquirer of smaller companies while 24/7 would be a target company. Valueclick bought FastClick last year.
Potential M&A Activity?
I can especially see Google buying 24/7 (or even Valueclick) to further its display/banner ad focus.
Remember, Google runs ad networks’ campaigns on YouTube but splits the revenue with these (other networks include Blue Lithium, Tribal Fusion, 24/7, MaxOnline) so it would make sense for them to buy one of these networks and retain 100% of the revenue.
To see what YouTube can make per month in display ads, click here.
To see how little Google can earn with Ad Sense on YouTube, click here.
Privately Held Targets: Blue Lithium, Tribal Fusion
I have no idea what privately held Tribal Fusion is worth, I can guesstimate that Blue Lithium does not want to sell unless the offer was ridiculously high. I know the company’s Chief Revenue Officer Tim Mahlman, a genuine gentleman whom I worked with sopradically between 2000 and 2005.
Anyway, according to a Business 2.0 story, BlueLithium has been profitable since its third month of operation and is on track to hit $100 million in revenue by the end of next year, 2007.
I am just guesstimating the following numbers:
If the 2007 $100M revenue figure is right, assuming a 40% growth rate then 2006 revenues for Blue Lithium are probably in the $70M range.
[note: using that 8 billion impressions / month figure in the same Business 2.0 article, and assuming the company makes $1.50 CPM gross, that equals to a monthly revenue of $12M, or $144M in revenue already this year, which is 44% higher than what CEO Gurbaksh Chahal says the company will make next year! So, is something off? No, the article says that Blue Lithium serves 8 billion impressions per month but Blue Lithium serves both CPM and CPC impressions, so not all of those impressions are sold on an impression basis. This is the only rational explanation we can think of to reconcile the numbers.]
Project a profit margin of 20% (it seems to be growing rapidly - thus hiring a lot - and has a higher than average R&D cost compared to its peers), then its earnings are $15M. Valueclick’s margins were 18% and 13% in 2004 and 2005 respectively, according to Google Finance, but since Valueclick is publicly traded and undertaken many acquisitions, I project them to have endured a lot of administrative costs that privately held Blue Lithium had not had to.
Valueclick boats a P/E of 38 (according to Yahoo! Finance), Blue Lithium grows faster but is privately held, so assume a 25% liquidity discount - thus a P/E of 75% x 38 = 28.5 times profits… and:
Blue Lithium right now could be worth $427M.
But if 2007’s revenues hit $100M, at the same margins and P/E, it will be worth some $700M.
Of course, with a CEO as ambitious as founder Gurbaksh Chahal (how many CEOs in online advertising do you know who openly mock Google?
“They’ve miserably failed in the last year with display ads,” he notes, “because they look at the world through text advertising.”), I am not sure even a $500M offer would entice Blue Lithium to sell, at $750M it could be a different story, but for $500M you can buy 24/7 RealMedia… though Mr. Chahal might be the first to tell me that I’m comparing apples with oranges…
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November 3rd, 2006 at 4:28 pm
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