Archive for October, 2011
Inuvo’s stock price has fallen precipitously since the announcement of the deal to acquire Vertro, a deal that will improve Inuvo’s balance sheet, improve its access to capital, double the search revenue flowing through the company and it is expected to make the company EBITDA profitable from day one. While it is not that unusual for the acquiring company to see their stock trade lower following the announcement of a large acquisition (as arbitrageurs sell the acquiror and buy the stock of the company being acquired), we believe that the selling in Inuvo may be overdone as Inuvo’s stock has fallen by over 30% since the deal was announced. To be sure that our investor community is aware of the many positive attributes of this merger, we are going to highlight several key aspects of this deal over the next few days. Below we discuss several points that some investors may not be aware of regarding this deal:
1) While Inuvo is the surviving entity, the terms of the deal actually result in Vertro shareholders owning slightly more shares of the combined company when the deal is complete, even though it will be called Inuvo. Given this and the fact that Vertro’s CEO will also be the CEO of the combined company, this is arguably as much an acquisition of Inuvo by Vertro as it is an acquisition of Vertro by Inuvo.
2) If the deal does not go through due to a higher bid for Vertro, Vertro will pay a breakup fee of $500,000 to Inuvo.
3) This is practically a done deal, approved in advance by the BODs of each company and by the largest shareholders of each company. While it could conceivably by blocked by the shareholders of either company, it seems unlikely given the very large holdings of the shareholders who have indicated their approval of the deal.
4) There are very real and significant synergies in the combination of these two businesses that should allow the combined entity to scale much more quickly than either would have independently. Several key advantages that do not appear to be understood by investors
a – improved balance sheet. On day one, the combined entity should have +/- $2m in cash on the balance sheet. The discussion on the post merger announcement conference call focused on the long-term debt picture (no new debt, just carryover of Inuvo’s $2.5 – $3.5m debt balance) and I do not believe that most understood that Vertro’s $4m+ cash balance should not be depleted by one time merger expenses. We are expecting that balance to fall in the $2m range.
b – access to capital – the combined entity will be able to obtain a much higher LOC from Bridge Bank than either could obtain independently, they will likely have a lower interest rate and more favorable access and payment terms.
c) Improved monetization of the Inuvo owned and operated websites – on the conference call, the question was asked about using Vertro’s Google Network ad feed to improve the monetization for Inuvo’s properties. It was answered in the negative based on the likelihood that we will not see that occur with regard to Inuvo’s search network. However, Inuvo’s owned and operated websites like Yellowise, Bargain Match and Babytobee should all be able to run the Google network ads within a reasonable time frame following the closing of this deal, which should have a significant impact on the revenue generated by those properties (we anticipate 25 – 35% improvement).
5) The integration of Inuvo’s Bargain Match App into the ALOT business model is where the rubber meets the road for this deal. It is likely why the deal happened and it is the one factor that has the greatest potential to make this a blockbuster deal.
The business model for Vertro’s ALOT appbar/homepage offering has traditionally had them seeking to pay an average of around $1 to acquire an appbar user that will generate an average of $1.40 in search/ecommerce revenue over the time period that they keep and use the appbar. What the company has searched high and low for and been unable to develop or buy is the killer app that would allow them to significantly expand the average “lifetime value” (LTV) of the base of users it acquires. They have had some winners – internally developed apps that likely caused them to pick up a few more appbar users, apps that likely caused some users to “engage” their appbar more often and some that might have resulted in Appbar users keeping/using the bar for longer than they might have otherwise. However, they have not been able to significantly expand the LTV of their average user. We believe that Inuvo’s Bargain Match “cash back” app might be the “killer app” that could expand ALOT user’s LTV significantly, it not exponentially for three reasons –
1) It causes those who add it to their appbar to engage with their appbar more frequently – the latest iteration released this week actually prompts the user if they visit a website that offers cash back. Bargain Match’s cash back app gives users a friendly poke to indicate that you can get cash back from this site and/or there are coupons that can be used here to save you money on any purchases here. In the upper right corner the consumer can see how much cash they have pending in their “cash back” account, which we believe will be a constant reminder that they have an appbar, more likely to see the utility in the appbar, more likely to download more apps and more likely to use it for a search from time to time (making them more likely to click ads that deliver revenue).
2) It causes appbar consumers to keep the appbar longer – they will be building up a cash balance and this will make them more likely to keep using the appbar and more likely to think about buying through sites that offer them the cashback and/or coupons. The longer they keep the appbar, the more the company will make in search ad revenue, ecommerce revenue, etc.
#1 and #2 above make Bargain match’s Cash Back Alot Rewards app the perfect app – these features have the ability to extend the lifetime value of each appbar download considerably. Where the company beats the bushes to come up with an app that will increase the LTV by some percentage, the ALOT Rewards app has the ability to increase it exponentially.
3) It actually makes money for Inuvo when consumers buy from the merchants that offer the cashback. While most of the cash changing hands as a result of a transaction from one of the 1900 merchants who work with Inuvo’s Bargain Match goes to the consumer, some small percentage of the deal also is paid to Inuvo. For instance, when a guest buys something from a retailer who pays the consumer 3% cash back, in most instances Inuvo actually earns 1% too. The percentage gets even larger for the higher paying merchants, where the consumer earns 5%-30%, Inuvo could earn 2 – 10%. While the numbers may seem small in the abstract on a transactional basis – the amount of value in the aggregate that could flow to Inuvo shareholders as a result of this is enormous. When a substantial number of appbar users have this app installed, we will begin to see material revenue generated through this aspect – consider when we get to 1 million appbars that are using this feature – if they spend $100 each and Inuvo earns 2% of this spend (both conservative numbers), you get an additional $2m in revenue for that quarter that has negligible expense associated with it – essentially all profit. To put those numbers into context, we believe that ALOT may add more than 3 million appbar users in areas where the cash back app would be offered over the next 12 months, so the idea that they could conceivably end up with 1 million users of this feature is not very far-fetched at all. This plays into what is perhaps the most important feature of how this deal can expand shareholder value – it will allow the ALOT marketing machine to pursue new users much more aggressively and scale the business more rapidly. Where they have very little margin for error when they are spending $1 to acquire users and making $1.35 to $1.40 over their lifetime value – they can start to spend more and acquire higher value users when they see that the LTV is moving up to $3 or $4. The aggressive spend allows them to get more users, more rapidly and its a virtuous cycle causing the growth to accelerate dramatically.
Thus, at the end of the day, this deal can add significant value for Inuvo shareholders based solely on #1 and #2 above. #3 is an added kicker that gives the potential for this to truly be a blockbuster deal.
Earlier this week, Inuvo (NYSE-Amex: INUV) entered into an agreement to acquire Vertro (Nasdaq: VTRO) in an all stock deal that pays Vertro shareholders 1.546 shares of INUV stock for each Vertro share. In an interesting development, a highly regarded hedge fund manager whose fund (Fertile Mind Capital – hereinafter “FMC”) is one of the largest holders (7.2%) of Vertro stock is challenging the Vertro Board of directors’ decision to accept Vertro’s offer. A schedule 13d(a) was filed last night with a copy of the letter to Vertro BOD chairman Larry Weber. The letter essentially takes the Board to task for selling the company at a price that he argues is well below the company’s true value and he specifically offers a series of valuation calculations based on a liquidation scenario to support the thesis that Vertro is worth between $3.38 and $4.39 per share.
This development is interesting on many levels – on the conference call with Inuvo CEO Richard Howe and Vertro CEO Peter Corrao, they made it very clear that one of the reasons the two companies where merging was that they are really too small to be publicly traded standalone companies. While they used the example of how their costs of being publicly traded are too great to be justified, they could have just as easily discussed how difficult it is for micro caps to attract and retain interest from investors, something that has been demonstrated quite clearly by the post deal announcement trading of each stock. Inuvo stock has fallen 30% on volume of only 28,700 shares TOTAL in the three days since the deal was announced despite acquiring assets in an all stock deal that should help the unprofitable company finally turn the corner to profitability. In fact, the discussion on the merger conference call made it very clear that management expects the company to be EBITDA profitable in the very first quarter of the combination and every other quarter of 2012. So INUV’s stock has traded mostly in a range between $1.50 and $6 over the last six months of unprofitable operations and when they strike a deal with obvious synergies that will vault them to near instant EBITDA profitability, the stock trades 30% lower with little to no volume. This downdraft in Inuvo shares has cut the market value of the deal (at yesterday’s close of $1.20) down to approximately $1.85 per share, representing only a 15% premium to the price Vertro’s shares were trading at before the deal was announced.
I think perhaps the most interesting thing about FMC’s letter is that the executives and board members of Inuvo might agree with much of what was presented in the letter. Vertro’s stock is definitively worth much more than $1.85 in any scenario (takeover, liquidation, continuing operations, etc.) and we have clear and convincing evidence that the executives, board members and top shareholders of Inuvo agree that Vertro is worth more. The problem is that they likely thought that they were paying more, as I think most would have expected the stock of Inuvo to be trading at a much higher level than where it currently trades. While most experienced investors and money managers know very well that stock prices over the near term often stray significantly from their intrinsic value, the best measure of what the insiders at Inuvo think the value of Vertro is can be determined by the value they place on their own Inuvo stock that is being used as currency. We have a very clear picture of that at least, as they have recently made substantial personal investments in Inuvo stock. Inuvo has completed equity offerings twice over the last two years, with the first being heavily weighted towards insiders and existing shareholders and the second one being taken down entirely by insiders and existing shareholders. The first issuance was at $2.50 (rs adj.) and the second issuance was at $2.20. It is interesting to note that the first two valuations ($3.38/share or $3.84/share depending on attrition rate)submitted as part of FMC’s letter to Mr. Weber are almost to the penny the value that Inuvo executives would place on it given that they offered to give 1.546 shares of a stock that they believe to be worth $2.20 – $2.50 per share based on their large purchases of stock in each offering:
INUV Stock Offering 1 INUV Stock Offering 2
Offering Price $2.50 Offering Price $2.20
x 1.546 INUV shares x 1.546 INUV shares
(1) $3.87 $3.40
(2) $3.84 (3) $3.38
(1) Value of VTRO based on Insider’s INUV Stock Purchases
(2) FMC Vertro Value at 30% Attrition
(3) FMC Vertro Value at 25% Attrition
It could be argued that INUV shares are worth something slightly more than that $2.20 – $2.50 range now, as they since paid down their debt by about half, reduced headcount by about 50% and settled nearly all significant litigation pending from the prior management issues.
In summary, it appears that all parties involved in this merger are in agreement that Vertro is worth much more than the current market prices would suggest and I expect that most would peg its value somewhere in the $3 – $4 range. While Inuvo owners/execs/directors might be quick to point out that they expect Vertro shareholders to be holding that much value per share in the not too distant future (after the deal closes), it will be interesting to see if the good folks at FMC and other shareholders are willing to wait that long. Given the indications made in the letter to Mr. Weber, it seems likely that there will be another offer made that is closer to that $3 – $4 range mentioned in the letter or at least an offer with terms perceived to be more attractive than the $2.71 price indication that was based on the last trade of each stock prior to the announcement of the deal. The Rumor Mill has long had Incredimail (Nasdaq: MAIL), Infospace (Nasdaq: INSP), Interactive (Nasdaq: IACI) and even AOL (NYSE: AOL) and the VC funded Conduit as suitors who were on the verge of paying a hefty premium to gain control of the $35m or so in Google ad revenue per year produced by Vertro’s assets. FMC’s request for a meeting with Vertro ‘s Mr. Weber to “…discuss ways to improve the purchase price of the acquisition” suggests that Vertro shareholders might see other options introduced to the mix. Stay tuned…..
Yesterday’s conference call provided many more details related to the Vertro-Inuvo merger. New Executive Chairman Richard Howe, CEO Peter Corrao and CFO Wally Ruiz participated on the call. We were quite pleased with the presentation and were left with the impression that this merger has the potential to create substantial value for shareholders of both companies. The combination of the two companies will create significant scale with operations reaching 132 million unique internet users per month, generating 240 million search queries per month, 2.5 billion page views annually and producing 20 million revenue generating clicks per month. The merger also reduces the company’s reliance on a single revenue provider – in the past both Inuvo and Vertro looked to Yahoo and Google respectively for upwards of 90% of their revenue. Following the merger’s close, the largest revenue contributor is projected to be Google with a revenue contribution of approximately 40 – 45% of total revenue.
The key takeaways from the call were that Inuvo has recently undergone a significant restructuring where they reduced headcount by about 20 employees. This comes on the heels of a very similar reduction in headcount that occurred at Vertro just a few months ago. Thus, the combined entity will actually be quite lean from the very start, with a total headcount in the 55 – 60 range. In addition to the cost savings that will result from these reductions, management believes that the combined entity will be able to save an additional $2.4 million per year in overall cost reductions. Most importantly, CEO Peter Corrao indicated that the combined companies (that will be known as Inuvo going forward) are expected to be cash flow positive from day one and that Inuvo expects to be EBITDA profitable in each quarter of 2012. Perhaps the most impressive takeaway for us was the fact that none of these projections built in significant contributions from Bargain Match or Kowabunga revenue being generated from the ALOT Appbar user base and no contributions from replacing Yahoo/Bing ads with Google ads on Inuvo web properties. We believe that Kowabunga and Bargain Match will be the major factors that drive Inuvo’s growth in 2012 and believe it may significantly increase and accelerate the ALOT operations’ marketing push as the company begins to experience very large and consistent increases in the lifetime value of appbar users. While we understand and agree with management’s goal of reducing their reliance on a single revenue source, we fully expect to see some of the Inuvo properties offering the Google ad feed at some point in 2012 and believe this will contribute significantly to the growth of the properties where that occurs.
In summary, we are quite bullish on the prospects for the combination of Vertro and Inuvo. We believe that management has wisely chosen to be cautious in managing expectations and they have accordingly made very conservative projections for the combined entity. We believe that investors would do well to establish positions in Inuvo/VTRO during Q4 before the deal is consummated and take advantage of any weakness related to tax loss selling and/or broader market weakness to build a position before investors begin to recognize what we expect to emerge as an explosive growth story in 2012.
Vertro and Inuvo management announced a merger this morning, with Vertro shareholders receiving 1.54 shares of Inuvo for each Vertro share owned, representing a 68% premium to Vertro’s closing price on Friday afternoon. We could not be more pleased with this marriage, combining the strengths of the Inuvo Platform (data analytics, affiliate distribution, high utility consumer facing apps, long standing Yahoo Search relationship) with the strengths of Vertro (installed user appbar user base of 8 million+, highly evolved search marketing expertise, Google Network advertising contract) while offering the potential for the elimination of between $2 and $2.5 million in redundant expenses. Given that each has been operating at breakeven or slightly profitable for the twelve months prior to the most recently reported quarter, it seems that the elimination of redundant expenses alone would springboard the combined entity to profitability. However, we believe that the real value that will be created for shareholders lies in the synergies between the operations of the two. Consider the following –
1) Vertro’s Alot Appbar marketing machine spends approximately $2 million per month marketing the Appbar/Homepage, on average spending $1 to acquire each consumer who will use the appbar’s search functionality or interact with the appbar in a revenue producing way such that he will on average generate about $1.35 – $1.40 in revenue. What happens when they include the Bargain Match reward program automatically with each appbar download? Bargain Match simply causes each user to get cash back for their online purchases at most of the major retailers in the US with little to no effort on their part and it also causes Vertro/Inuvo to earn some small percentage of each purchase. While it may seem small as a percentage of each customer’s purchases, the potential to earn even an extra dollar or two from each appbar user would cause an exponential improvement in the margins of this business and have a dramatic impact on the top and bottom line.
2) The potential to integrate a local daily deals offering into the appbar marketing process and/or offer a Kowabunga Daily Deals app to the millions of existing appbar users will result in some percentage of the user base interacting with the Appbar on a daily basis to see what deals are offered. Vertro has long offered Ebay’s daily bargains app that offers national specials and that has been one of Vertro’s largest sources of non search revenue. What happens when the deals are more geographically targeted, offer huge discounts on products/services and the VTRO/INUV earns 10 – 40% on each deal instead of the 4 or 5% they might earn on an Ebay deal? It now becomes possible that some portion of the customer base that we pay $1 to acquire will produce revenue of $3 to $50 on a daily deal purchase,that customer might do it multiple times, they might use the social media tools integrated into the service to pass it along to friends and so on. Thus, the integration of Inuvo’s consumer offerings has the potential to substantially increase the revenue generated by and the lifetime value of each appbar user.
3) The potential to monetize Inuvo search with Google PPC ads – while it is by no means a given that all of Inuvo’s search revenue driven properties would convert their Yahoo/Bing ad feed to a Google feed and we can see value in maintaining the relationship with both Yahoo and Google, we do believe that there will be an opportunity for Inuvo/VTRO to use the consistently higher paying Google ads for some portion of its search traffic and we would expect to see a significant increase in the revenue generated for those properties. Inuvo actually generated slightly more search revenue than Vertro did over the last 12 months, so the introduction of a Google Ad feed could have an immediate and significant impact on the company’s top and bottom line. Further, if the company were able to offer an ad feed to third parties that incorporated the Google Ad feed, they would not only earn more per click but also would be more likely to attract more higher traffic third party websites to join its search network.
4) Inuvo’s affiliate platform can be used to market Vertro Appbars – Inuvo has thousands of websites that successfully market many different web products and services on a “cost per action” basis. Inuvo’s access to the data related to who, what and why things do well through this channel should prove quite valuable for marketing ALOT’s appbar and homepage products.
In addition to these product line specific opportunities, we note that the company will enjoy many new benefits associated with its significantly larger scale – with over $70m in trailing twelve month search revenue, a stronger balance sheet and the likelihood of a substantially larger line of credit all lead us to believe that the combined entity will have greater opportunity to grow the company organically and through acquisitions. These are just a few of the major advantages we see accruing to shareholders if the Inuvo/Vertro merger is consummated. We are extremely bullish about the prospects for such a combination and look forward to the conference call after the market closes today for further enlightenment.
As many of you are apparently aware, we updated the GrooveVC website this morning with the due diligence report for our new focus stock – Inuvo. You can access the report by clicking here
We will no longer post the full due diligence reports to the blog – too many complaints last time. Let us know what you think about our new focus stock and also any ideas you have for helping the company “get the word out” about the great services they have and their ridiculously cheap stock. Thanks again for being a party of the GrooveVC community.
P.S. Hoping that many of you have set aside a little for rainy days like today. There is a great fire sale going on with many stocks today, including Vertro.