Overstock.com Has Takeover Appeal: Who Will Be the Lucky Match?

Overstock.com (OSTK) leveraged buyout and takeover rumors are fairly recent. We first reported them on December 1, 2006 when the stock was still at $15.00 per share. This takeover chatter has helped drive OSTK over 10% higher in less than two weeks.

Overstock.com:

Overstock.com is an online closeout retailer based in Salt Lake, UT that offers discounted brand name merchandise. OSTK currently has a market cap of $346M. True, OSTK earnings and growth have been negative, along with its Alexa ranking [traffic to their site] decreasing, but quarterly revenues have still been almost 50% of its market cap. Much of the blame has been put on the CEO, and he was recently named second-time runner up for the "Worst CEO of 2006".

Short Interest:

Short interest is at a surprising 48% of the float - or almost 28% of outstanding shares. Any single positive announcement - even related to the Christmas season - could cause a significant squeeze. This holds especially true for any announcement of a bid or takeover.

Analysis of takeover appeal:

With $133M in liquid assets and the Christmas season upon it, a market cap of $346M could look attractive as a leveraged buyout candidate, as over 40% of the market cap is in liquid assets. With yearly revenues of about $800M, a new CEO that is able to increase profit margins even slightly would be able to pull a profit - even an increase of less than 1% could do the trick. [Seriously, would users really mind paying $172 for a 4 GB Apple (AAPL) iPod Nano instead of just $170? It would still be a $27 discount from retail, or even at least $7 from Amazon.com (AMZN)]. A slight increase in pricing most likely wouldn't kill sales, yet it would increase profit margins sufficiently to actually have positive net income, and at the same time they would still be killing Amazon.com pricing for many items.

In November, when OSTK earnings were worse than investors had hoped for, the stock tumbled from $18.00 per share to around $14.00 - creating a perfect opportunity for an interested party to make a bid for the company. Short interest also climbed to massive rates. Someone taking advantage of all of this selling should probably act soon, as there will most likely be significant buying when any positive announcement is made.

OSTK 1-yr chart

Carl Ichan:

Carl Ichan has been rumored as a possible suitor for OSTK. Recently his bid for Reckson (RA) was rejected, and he may be looking for a place to put the $1B in cash he was planning to spend on that deal. OSTK could be a good opportunity for him.

AMZN:

With a market cap of almost $16B and cash of over $2B, the acquisition of OSTK, which would increase its yearly revenue by almost 10%, for $400M or $500M could be quite positive. They could have their experts fix up the business model of Overstock.com and turn a profit fairly rapidly.

Such an acquisition [if turned profitable] could eventually increase the market cap of AMZN significantly. Consumers buying products in significantly more volume [and an increase of 10% to AMZN is definitely significant] would allow the new company to negotiate significantly better prices and increase its profitability substantially.

eBay (EBAY):

In a very similar situation to that of Amazon.com, eBay is another possible acquirer. EBAY has a market cap of $44B and liquid assets of $4B. They could easily purchase OSTK without any trouble. Integrate Overstock.com with eBay's Half.com people, knowledge, experience and site, and you could get something significantly more profitable.

Google (GOOG) or Yahoo (YHOO):

While they don't have the same expertise as EBAY or AMZN in selling products online, it would be a good opportunity to compete with those two companies on their own turf and grab new market share on the internet. It would also be a good opportunity to continue to diversify their internet portfolio, and increase their non-search assets and revenues.

If either decided to promote Overstock.com, they would be able to significantly increase traffic to the site, along with sales, and it wouldn't cost them anything but one position in searches. They would also be able to integrate Ovestock.com more fully into their respective item purchasing/auctioning clients. OSTK could be a good match with a big internet company like GOOG or YHOO.

Bottom line: OSTK appears to be a good takeover candidate for a big web company, or even a private equity firm, as yearly revenue is more than double its market cap and liquid assets amount to about 40% of the current market cap. It would be a risky acquisition, but could definitely pay off in the end.