Vertro Acquistion Rumors
Vertro takeover rumors pop up from time to time and most recently it was rumored to have received a bid from a Nasdaq listed company based in Israel. While I give very little credence to rumors that appear to be conceived, born and do most of their growing up in message board forums, we have recently had a number of members in our online community ask questions about Vertro’s value to other companies in an acquisition scenario so we thought it might be a good time to address them.
The most recent deal rumor alluded to a company based in Israel – just a little digging turns up two companies whose profiles suggest that they could presumably have some interest in a combination with Vertro. The two companies are:
1) Answers.com which is a search/answers engine company that includes the properties Answers.com, WikiAnswers® and ReferenceAnswers. Like Vertro, Answers.com derives nearly all of its revenue from Google Adsense (89% of revenue for the 9 months ended Sept. 30) and expects to do around $20 million in revenue in 2009. Answers.com has a market cap of about $65 million, has nearly one third of that in cash ($21 million+) and has no material debt.
2) Incredimail which is a desktop software company best known for its Incredimail email application and its “HiYo” graphic add on application for Instant Messaging. Like Vertro, Incredimail (MAIL) derives nearly all of its revenue from Google Adsense (75% of its revenues in the most recently reported quarter). MAIL has revenue for the 9 months ended Sept.30 of $19.7 million – virtually identical to Vertro.
Could they buy Vertro?
1) Answers.com – Though Answers.com actually produces lower top line revenue than Vertro, ANSW’s business model requires a much lower advertising spend to produce their revenue, which results in a higher bottom line profit. One could easily argue the merits of one business model over the other (ANSW argues lower costs, higher current profitability, Vertro argues its model more predictable than ANSW given ANSW’s reliance on organic traffic from third parties), but the bottom line today is that investors have awarded ANSW with a much higher valuation than Vertro. ANSW currently sports a market cap of around $65 million and because they have about 1/3 of that in cash, they could afford to buy a company like Vertro. If Vertro were willing to sell at the rumored price range of $40 – $45 million, ANSW could do an all stock deal or possibly even do a half cash / half stock deal.
2) Incredimail – though MAIL produces identical top line revenue to Vertro, MAIL’s business model also produced net income of $5.9 million during that period. MAIL has a market cap of just over $80 million, no material debt and over $30 million in cash on its balance sheet. Thus, they could easily do an all stock deal in the range of $40 – $45 million that would presumably give Vertro holders around one third of the combined company’s shares. Of course, MAIL’s cash position would also allow them to do a half cash / half stock deal that would not deplete their considerable cash position.
Why would they want to buy Vertro?
1) Answers.com would want to buy Vertro because it would more than double their Google Adsense revenue and likely give them a higher percentage payout on its existing Google generated revenue. Most of the larger Google parnter relationships have tiered structures that award higher click revenue with higher percentage payouts. Answers.com’s current level of revenue generation for Google likely puts them in a lower earning bracket than Vertro. Adding Vertro’s $30m annual Google run rate to ANSW’s $20m annual run rate makes a formidable $50m Google Ad partner that would both earn higher rates for the duration of the existing contracts, but also have a much better bargaining position when it comes time to execute a new contract.
Also, Answers.com could conceivably use its resources to help Vertro get more toolbar downloads with a lower ad spend, thus adding to the profitability of its business model. Conversely, Vertro’s toolbars and homepages could feature Answers.com content, giving ANSW the potential for exposure to 5.5 million new consumers.
2) MAIL would want to buy Vertro to double their Google Ad revenue and take control of what is likely a higher revenue share. While no one dicloses their Ad share with Google, we know that Vertro’s toolbar division has long been one of the higher producers among “Google Network” partners and it’s revenue share likely reflects that – we believe its in the 80% range. MAIL has only recently scaled its search revenues to this level and they are still operating under an agreement reached when they were producing at much lower level. Thus, buying VERTRO would likely allow MAIL to get a higher payout across its existing revenue base in addition to the acquired revenue base and also allow them to negotiate the next contract as a $50m + producer.
Additionally, In the Q & A session of its most recent quarterly call, the CEO of MAIL indicated that the company was actively pursuing acquistion candidates and described the best target as a B2C company with a downloadable application that is synergistic to Incredimail and one that would be close enough to profitability for MAIL to easily make them more profitable. Vertro’s Alot portfolio is a B2C downloadable application that would be highly synergistic with Incredimail – the millions of consumers that are introduced to the toolbar and home page each quarter could just as easily be offered one of the Incredimail products as an opt in or opt out part of the package. Thus, if MAIL wanted to keep up the $6 million in ad spend each quarter, they could concievably add tens of thousands (maybe hundreds of thousands) of new mail clients without increasing that ad spend. Additionally, it seems that MAIL could easily offer the ALOT toolbar and/or Home Page to new Incredimail customers, possibly adding enough new users through that channel to allow them to reduce the Vertro ad spend each quarter. In September, Vertro completed its first breakeven/profitable month and they should achieve their first breakeven full quarter in the current Q4. If Vertro is able to achieve this level with the current cost structure, an acquiror would enjoy even greater profitability as they removed some of the executive management/board comp packages and other duplicative costs of being a publicly traded company, Vertro could go from expecting to earn $3 – $4 million in 2010 to actually earning $6 – $7 million instead.
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