Google / On2: Deal Insights

There was a time about two years ago when I received a barrage of emails and phone calls from contacts who were heavily invested in On2 Technologies (ONT). At the time, ONT shares traded at about 2.75.

Although I liked the technology, ONT stock price just seemed too rich to me. I wrote:

I think that my readers may have correctly pegged ON2 as one of the rare winners in the codec business. Its TrueMotion VP6 codec is included in Adobe Flash Player 8 and 9, and some consider its TrueMotion VP7 to be the premier video compression scheme today. The company also provides the Flix Engine to transcode video into mobile formats. ON2 is almost in the black, eeking out an operating profit but still posting GAAP losses last quarter.

However, it is unclear whether the prospects for ON2 stock are as bright as its technology. The company already has a market cap exceeding $318 million, indicating that investors have already priced a great deal of promise into the stock. Against this backdrop, sales remain relatively meager — only $2.815M last quarter. Annualized, that is only $11.26M, giving ON2 a price/sales ratio of over 28. In contrast, after backing out the cash on its balance sheet, video codec company DivX trades at a price/sales ratio of under 6. That doesn’t ensure a pullback, but it does lower the odds of repeating the rally ONT shareholders have enjoyed over the last 9 months.

It was a good time to stay on the sidelines. Over the next year-and-a-half, ON2 shares plummeted to as low as $0.11. There is no doubt that this stock disappointed a lot of investors. But readers were absolutely correct in identifying ON2 as a company with valuable technology. Last week , Google announced it would buy ON2 for $106.5 million in stock.

"Google sees video compression as a necessity," said Andrew Frank, research vice president of Gartner Inc. "I think this acquisition means that Google is making sure its has a piece of imbedded infrastructure in order to get some better control of how video is distributed."

The buyout, which valued the company at less than a third of its 2007 peak, teaches a valuable lesson. Great technology does not ensure a great trade. Risk-reward has to be measured by stock price levels, fundamental ratios (especially price or enterprise value-to-sales), news flow, and event risk.

ON2 Technologies (ONT)

DISCLOSURE: No position.

Comments

[Ben Boult:]

All owners of On2 Technologies (ONT) stock go to this website www.vote4on2.com and vouch 2 vote against Google stealing On2 for .60

Aug 10 06:48 AM

[On2 Shareho...:]

Thank you for picking up this story, it is an interesting one.

However, I would have expected a share-price analysis from Seeking Alpha to at least note that On2's shares, traded as ONT on the AMEX, have been the subject of brutal and predatory bear-attacks for over two years. The ONT share price has been hammered down, not because of a loss in confidence by long-term retail investors, not because of a change in the company's prospects, which have never been better, but simply because someone with deep pockets wanted ONT shares to be cheap, and they weren't afraid to break the law to get their way.

The anger and dissent with this deal heard from ONT shareholders is not just bad-loser rant-and-ramble, nor simple conspiracy theory. ONT was extremely aggressively shorted down from its highs of 2007, and much of the shorting was illegally naked, as documented by the regular occurences of ONT on AMEX's RegSHO lists. There actually were criminals at work trying to crush this company out of existence, similar to the experiences at Overstock.com and Dendreon, as documented at Patrick Byrne's website deepcapture.com.

As with most published news these days, it pays to go out to the web to do a little digging to see if one can get closer to the truth. In this case, yes, you have published a factually correct article. ONT did hit a low of 0.11. But you missed the real story here, which is the one that answers *why* the stock was trading there, despite the imminent turnaround to profitability, the excellent prospects for exponential profit growth, and the broad acceptance of On2 technology by large industry players, to the chagrin of other large players. On2 simply got caught in a clash of the titans: Apple, Adobe, MPEG-LA, Sun/Oracle, all the phone and cable companies that provide internet access, NetEase and other Chinese players all had vested interests in seeing On2 either live or die, not just Google. One or more of these large players would appear to have stooped to criminal behaviour to gain advantage in the high-stakes internet video battleground.

You wrote: "The buyout... teaches a valuable lesson. Great technology does not ensure a great trade. Risk-reward has to be measured by stock price levels, fundamental ratios (especially price or enterprise value-to-sales), news flow, and event risk."

But when "event risk" must necessarily include "risk that criminals will illegally manipulate the share price" then the public markets are no longer to be trusted. If SeekingAlpha chooses to support a world in which this is the case, continue to report in this fashion.

But if Seeking Alpha would like to see a world in which private retail investors can trust, and therefore will invest their savings in the public markets, then dig deeper, because you have missed the real story here.

The interesting question is which one of the various companies and groups above might have been responsible for the criminal manipulation of On2 Technologies publicly traded stock.

Thank you in advance for following up on this.

Aug 10 11:11 AM

[Silverfox2:]

ON2 Technologies had great technology, but it's management team was less great. History shows it's better to bet on the jockey, not the horse. See another internet video public stock, KIT Digital, for an example of a good, properly incentivized CEO. Company has no patents, but is out-executing it's competitors. Disclosure: long KDGL.

Aug 10 12:01 PM

[User 468070:]

You are clearly biased towards Google since you haven't mentioned On2's VP8, it's latest codec and possibly Google's motivation for robbing the shareholder's of On2 of the true value of the company.

You have also neglected to mention On2 is returning to profitability with increased business. In fact, had it not been for legal fees associated with Google takeover, On2 would have been able to issue a news release telling of a profit.

Naked shorting has artificially brought On2's share price down for the last 2 years while the acting CEO (Matt Frost) and On2 Board of Directors pretended they would hire a real CEO.

Matt Frost, the CEO of On2 is a highly irresponsible, deceiptful acting CEO. All you need to do is review last week's conference call at sec.gov:

www.sec.gov/Archives/e...

The shareholders of On2 have taken initiative with a lawsuit due to the complete absence of an auction process:

www.zlk.com/ont1.html

You have also not included your name as the writer of this article.

Aug 10 07:41 PM

[FAFUFNIK:]

RIGHT ON-----YOUR POINTS ARE ABSOLUTELY ON THE MONEY---THE REAL STORY HERE IS THE INJUSTICE PERPETRATED BY THE TWO COMPANIES BASING THEIR PRICE FOR THE SALE ON STOCK MARKET DATA WHICH REFLECTS THE ABSOLUTELY FALSE IMPRESSION OF SUPPLY AND DEMAND AND PRICE DISCOVERY BECAUSE 70-90% OF THE DAILY TRADING IS DONE BY HIGH FREQUENCE COMPUTERIZED TRADERS AND NAKED SHORT SELLERS---If the author is really interested in reporting the truth, here is an absolutely perfect opportunity to do some research into the trading history of ON2 to unmask the entities who are doing most trading---having watched Level II daily, several hours a day, for the two years since Christopher Cox enabled selling on the downtick. Anyone who has not done this should not be commenting on the reliability of the apparent share price of this stock---casual observation will reveal nothing, especially to the uninitiated observer of trading on the stock market. Do your homework or do not deign to recite before the class or the teacher will order you to SIT DOWN.


On Aug 10 11:11 AM On2 Shareholder wrote:

> Thank you for picking up this story, it is an interesting one. <br/>
>
> However, I would have expected a share-price analysis from Seeking
> Alpha to at least note that On2's shares, traded as ONT on the AMEX,
> have been the subject of brutal and predatory bear-attacks for over
> two years. The ONT share price has been hammered down, not because
> of a loss in confidence by long-term retail investors, not because
> of a change in the company's prospects, which have never been better,
> but simply because someone with deep pockets wanted ONT shares to
> be cheap, and they weren't afraid to break the law to get their way.
>
>
> The anger and dissent with this deal heard from ONT shareholders
> is not just bad-loser rant-and-ramble, nor simple conspiracy theory.
> ONT was extremely aggressively shorted down from its highs of 2007,
> and much of the shorting was illegally naked, as documented by the
> regular occurences of ONT on AMEX's RegSHO lists. There actually
> were criminals at work trying to crush this company out of existence,
> similar to the experiences at Overstock.com and Dendreon, as documented
> at Patrick Byrne's website deepcapture.com.
>
> As with most published news these days, it pays to go out to the
> web to do a little digging to see if one can get closer to the truth.
> In this case, yes, you have published a factually correct article.
> ONT did hit a low of 0.11. But you missed the real story here, which
> is the one that answers *why* the stock was trading there, despite
> the imminent turnaround to profitability, the excellent prospects
> for exponential profit growth, and the broad acceptance of On2 technology
> by large industry players, to the chagrin of other large players.
> On2 simply got caught in a clash of the titans: Apple, Adobe, MPEG-LA,
> Sun/Oracle, all the phone and cable companies that provide internet
> access, NetEase and other Chinese players all had vested interests
> in seeing On2 either live or die, not just Google. One or more of
> these large players would appear to have stooped to criminal behaviour
> to gain advantage in the high-stakes internet video battleground.
>
>
> You wrote: "The buyout... teaches a valuable lesson. Great technology
> does not ensure a great trade. Risk-reward has to be measured by
> stock price levels, fundamental ratios (especially price or enterprise
> value-to-sales), news flow, and event risk."
>
> But when "event risk" must necessarily include "risk that criminals
> will illegally manipulate the share price" then the public markets
> are no longer to be trusted. If SeekingAlpha chooses to support a
> world in which this is the case, continue to report in this fashion.
>
>
> But if Seeking Alpha would like to see a world in which private retail
> investors can trust, and therefore will invest their savings in the
> public markets, then dig deeper, because you have missed the real
> story here.
>
> The interesting question is which one of the various companies and
> groups above might have been responsible for the criminal manipulation
> of On2 Technologies publicly traded stock.
>
> Thank you in advance for following up on this.

Aug 12 08:43 PM

[User 472110:]

wayonda.com/index.php?... The story can be viewed here.

Aug 15 11:10 PM