Is Vertro In Play?
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…..
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