The Unappreciated Benefits of an Inuvo – Vertro Combination

October 27, 2011 at 3:16 pm Leave a comment

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.

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Is Vertro In Play? BargainMatch and Investor’s New Appetite for Coupon Services

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