Suitors For TheStreet.com: Financial Media and Online Brokers?

TheStreet.com (TSCM) gets more than its share of negative coverage in the blogosphere. Henry Blodget calls it "the biggest single risk-factor at any one company since Martha Stewart Living Omnimedia." Michael Panzner argues that Cramer's fortunes may be turning.

True, TSCM remains tied largely to Cramer. With an enterprise value of over five times revenue, it's not cheap either. But Blodget and Panzner miss the larger point.

TheStreet.com stands to benefit from two emerging trends:

Financial media M&A: News Corp. (NWS) bids for Dow Jones (DJ). Thompson buys Reuters (RTRSY). While TheStreet.com is certainly not in the same class as either of these companies, it does have cachet among retail investors. Consider CNBC (CNBC) as a possible suitor. If it loses the Dow Jones relationship to Fox News, NBC will have to strengthen its ties to TheStreet.com. Who else is there? The only other first tier company is Bloomberg, and it is a rival to CNBC. And there are other possibilities. With an enterprise value of $277M, TheStreet.com is a manageable acquisition for many media companies.

And what about TheStreet.com's longtime rival, Marketwatch.com? That was acquired acquired by Dow Jones in 2004 for over $450 million.

Online brokers beefing up offerings: Online brokers are fighting tooth and nail to win the accounts of retail investors that either trade actively or maintain large balances. In years past, these battles focused on lower commission rates, but now the brokers are offering first class trading tools and research. According to this article, Ameritrade (AMTD) ponied up $90M to buy the QuoteTracker and StrategyDesk tools it offers free of charge to Apex customers.

Ameritrade also cut a deal with Minyanville to give free access to Apex customers (note: I have two accounts at Ameritrade, am an Apex customer, and use StrategyDesk occasionally and free access to Minyanville daily). Scottrade cut a similar deal with Trade-Ideas. The brokers finally figured it out -- if these services can convince their account holders to place one or two more trades per month, they can generate a huge amount of revenue.

TheStreet.com's RealMoney and Minyanville's Buzz & Banter have more than a dozen well-reasoned trading ideas each day. With Minyanville already snagged by Ameritrade, RealMoney could be a nice fit for E*Trade (ETFC) to offer to its E*Trade Pro level customers. This could be either a licensing deal or a takeover.

Beyond these potential boosters, TheStreet.com has other assets which are generally ignored by the market. In particular, the Stockpickr acquisition stands out (on that note, a long overdue congratulations to James Altucher, whose vision and execution guided the site from concept to beta to buyout at breakneck speed). Don't underestimate the revenue potential if this becomes the standout winner among financial web 2.0 sites. I also think that the pro level Street Insight, while a relatively small factor now, could be leveraged into something more substantial.

I'm not buying just yet. I have a strong bias towards deep value, and TSCM doesn't fit that bill. But I have added it to my watch list and might start nibbling if it breaks above resistance around $12.25-.50.

DISCLOSURE: I have no position in TSCM, or any other stock mentioned in this article. I have two brokerage accounts at Ameritrade and am a subscriber to RealMoney, an offering of TSCM. Not a recommendation to buy or sell any security. For informational and educational purposes only.

Comments

[Frank Li:]

Full disclosure before you read my comments: I'm short TSCM in my fund, and this isn't my real name because I want to remain anonymous. Now for the comments:

1. TSCM is not an acquisition candidate because of its dependence on Jim Cramer. Remember that the company was for sale for about a year, and nobody paid up, even when its stock price was considerably lower than it is now. An investment banker told me off the record that he looked at TSCM a few years ago for one of his clients, and concluded that the dependence on Jim Cramer totally ruled it out as a viable acquisition. Only this weekend, there was a Barron's article which argued that acquirers want user generated content, not editorial content, and that TSCM is also too dependent on Cramer: internet.seekingalpha....

2. You're right that the online brokers are battling for new accounts, but buying companies to provide free content to their clients isn't what they've done so far, and there's no reason to assume they'd do this now. In the examples you gave, remember that Ameritrade <b>partnered<... with Minyanville, as did Scottrade with Trade-Ideas. Subscriptions to Real Money are expensive; if Ameritrade gave them away for free, an acquisition of TSCM would be massively non-accretive and would require write-offs. More fundamentally, I suspect that the online brokers view their research and data offerings as ways to stimulte trades and maintain the loyalty of their current customers, rather than attract new customers, because people don't usually select a broker for its research. If Ameritrade or E*Trade acquired TSCM, I think their stocks would take a massive beating -- and that's a thought experiment that suggests that they shouldn't and wouldn't do it.

3. James Altucher is smart and stockpickr is a creative attempt at user generated content. But most people I talk to don't find it useful. And it now faces a crushing challenge from <b>Covestor and VesTopia</b> which provide real portfolios, not the artificial portfolios of stockpickr or the CNBC game or the Motley Fool's CAPS game. TSCM's acquisition of Weiss Ratings was much more meaningful financially.

4. TSCM is highly dependent on Yahoo Finance. Our fund's research suggests (unconfirmed, so check this for yourself) that TSCM purchases most of its traffic from Yahoo Finance and makes money on the spread selling ads at a higher price than it buys traffic for. The arbitrage business isn't that attractive to buyers, and also TSCM has squeezed almost everything it can from each visit: tons of ads on each page, and each article sliced into multiple pages. Soon it will hit a wall on revenue growth.

I'm not saying that TSCM won't do well in the near term. But I'd be amazed if TSCM was acquired as you predict.

2007 Jun 11 09:03 AM