Yesterday, Web.com (WWWW) announced the acquisition of WebSource Media, adding about $9 million in annual revenue to Web.com. The acquisition price is performance-based, and includes a combination of cash and stock based on the future results at WebSource. Given that future numbers will determine the ultimate valuation, it is difficult to give a clear financial opinion on this acquisition, especially since the SEC filings omit any hard operating numbers.
I'll give a back of the envelope valuation later in this post, but in any case it is my general feeling, that in small "vague" acquisitions such as these you really need to trust management and assume that the acquisition will be beneficial to shareholders from both a strategic and financial perspective.
Since the new management team at Web.com has executed amazingly well during the past year, especially given the nature of the legacy problems at Interland (the former name of Web.com), I am willing to assume that this acquisition will prove rewarding for Web.com (WWWW) shareholders. Additionally, since the CEO of Web.com, Jeff Stibel, is a major shareholder of Web.com with 2.3 million shares, his interests are clearly aligned with other shareholders and provide a degree of comfort in the value created by this and other deals.
With that said, there are a couple of interesting things to point out about this acquisition:
* Since WebSource is profitable, I am willing to bet that with this acquisition, Web.com will be solidly in the black on a go forward basis. As noted in a prior post, the company was very close to breakeven last quarter, and so it seems likely that with this additional revenue, profits should be forthcoming quite soon. With my expectation of upcoming profits, year-over-year comparisons will look quite amazing (profits vs. losses), helping to boost Web.com's stock. As noted on this blog in the past, companies that report profits vs. losses on a year-over-year basis, can significantly outperform the market, assuming other criteria (i.e. low valuation) are met.
* If you assume that Websource will meet all its operating goals, Web.com will end up paying about $11 million in cash and about $14 million in total stock (I'm assuming 1 million in options at $6, plus another 1.5 million shares issued at $0.01, but valued at current market prices), for a total consideration of about $25 million. This would be about 2.8X Websource's estimated annual revenue, which would be a fair price given current industry multiples.
* Finally, the most interesting thing about the acquisition is that if WebSource meets its targets, the current owners of WebSource will seemingly become the largest shareholders of Web.com. I'm not sure if that is a good or bad thing, since I know nothing concerning the current owners of WebSource, but it does seem odd that with such a small financial contribution WebSource's owners will be able to exercise a large control over the future of Web.com. At the same time, as the largest amount of shares of Web.com become concentrated in the hands of a few shareholders, it would seem that these shareholders will do all that it takes to increase the value of the shares, so as to provide some liquidity event for their holdings. The need for liquidity for the large sharholders, can only benefit minority shareholders of Web.com.
Please Note: I first recommended Web.com (WWWW) at $3.25, and still hold a position in the stock. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.