Last month I noted a strong bull run in InfoSpace (INSP), a tiny Internet search provider (through dogpile.com and webcrawler.com, among others). I speculated that the then-much-discussed drama surrounding Yahoo's (YHOO) potential takeover by Alibaba Group might have led to a one-week gain in INSP of 15% on heavy volume, and recommended INSP as a solid buy.
Looking back, it's unclear what exactly caused INSP's rise, which continued for most of December. But big news followed the stock's upward climb, as InfoSpace finally delivered on its long-standing promise to purchase another company with its heavy cash balance (over $7/share) and $788 million worth of net operating loss carryforwards (NOLs). On Monday, the company bought TaxACT, an online tax provider, for $287.5 million. The stock spiked on the pre-market news, then gave it back its gains to close down slightly. However, the march higher has continued, and INSP closed Thursday at $11.85, its highest close in nearly four years.
To be clear, the merger was done for purely financial reasons. While InfoSpace and TaxACT both share Internet-focused businesses, that is essentially the end of their similarities. TaxACT will continue to operate as a stand-alone business, and synergies and cost savings between the two companies would be appear to be minimal. (Indeed, there is no mention of any such benefits in the InfoSpace presentation [pdf] that accompanied the merger annoucement.)
Before the merger, InfoSpace's cash balance and strong cash flow on an enterprise basis were the foundation of the bull case for the stock. The cash balance will be wiped out by the purchase -- the company is taking out a $95 million loan, and expects to have just north of $90 million in cash following the acquisition's closing. But cash flow should continue to be strong. TaxACT would have added nearly $33 million in levered cash flow to INSP over the past twelve months; the combined companies would have earned over $40 million, or about 9% of the stock's market capitalization of $446 million at Thursday's close. That is despite a sluggish year (and some negative working capital adjustments) for InfoSpace's legacy search business, which generated $75 million in free cash in 2009 and 2010 combined. On an earnings basis, the combined entities have trailing 12-month non-GAAP income of $1.21 per share, keeping the stock's P/E below 10.
TaxACT should add some growth to the combined company, as well. TaxACT has grown revenues at nearly 20% a year over the past five years, and should see continued growth as more and more taxpayers use online services. InfoSpace's search business has seen revenues flat-line (nine-month revenue for 2011 was down slightly from the year-prior period), so the addition of TaxACT should add some potential for revenue and earnings growth, and corresponding multiple expansion in the stock price.
Going forward, INSP still looks to have some upside. The combined business is still valued at just about 10x on an earnings and cash flow basis, and the $90MM remaining in cash will allow for additional future acquisitions. Given the management team's patient search for what appears to be a successful and sensible target, investors can have confidence that potential "follow-on M&A opportunities", as INSP called it, will be similarly accretive to earnings and positive for the stock price. The TaxACT acquisition seems to be fairly valued; as the Wall Street Journal noted, InfoSpace paid the same price for TaxACT that H&R Block had offered before that deal was scuttled by the government over antitrust concerns. Given the stock's recent 40% rise, INSP shareholders are no doubt thankful for the government's intervention. But, even given that jump, INSP appears to offer value at current levels.