Think Partnership Shareholders Seek IPO of Kowabunga/Network Division

Several large independent shareholders of Think Partnership (AMEX: THK) are pressuring management to seek a spin off of the company’s network division into a separately traded Nasdaq listed company named after its highly regarded “Kowabunga!” unit.

The following is a direct quote from the letter addressed to CEO Scott Mitchell and the Board of Directors:

Think Partnership’s (hereinafter “THK”) shares continue to trade substantially below what we believe to be fair value. We believe the company’s network division alone is worth 25 -30% more than the entire company’s existing market cap. The valuation trading range for Think Partnership stock leads us to believe that the network division is being wholly overlooked by the investment community because it resides under the THK holding company umbrella. We also believe that the considerable growth prospects of the company’s Kowabunga!, Primary Ads, ValidClick.com and SecondBite.com assets would be significantly enhanced if the company were valued as an independent entity.

As such, we respectfully request that the Board of Directors give due consideration to a spin off of the network division prior to the end of calendar year 2007 through an IPO of the network division’s assets into a separately traded company called “Kowabunga! Technologies”. The THK network division’s (hereinafter “Kowabunga!”) revenue run rate, growth trajectory and client list along with its placement in the hottest of hot sectors within the technology industry would make it an ideal candidate for an IPO.

We believe the company could raise $75 - $100 million by floating 30 - 40% of the shares of this division. We believe such a move is necessary to accomplish several objectives:

1) allow the company to raise the cash resources that would allow these growth vehicles the flexibility they need to expand;
2) give the division its own currency to enable it to be more aggressive in acquiring other growth vehicles;
3) allow the company to attract and retain talented employees and management with stock options that are closely aligned with the performance and value of this division;
4) allow better clarity for the marketplace to value these high margin producing / high growth potential assets similar to the way it values other rapidly growing high margin companies in these niche markets (search / online advertising / affiliate marketing).

In a market that appears to be increasingly accepting of small cap initial offerings, we believe that a spin off of Think Partnership’s network division would be very well received by the marketplace.

As you are aware, Kowabunga!’s assets fall squarely in the center of what is arguably the hottest of all hot markets - the rapidly consolidating online advertising sector. With the recent flurry of acquisition activity amongst the technology sectors largest players (Google’s purchase of DoubleClick , Microsoft’s purchase of Aquantive and Yahoo’s purchase of Right Media among others), investor’s ability to buy into a growth story directly focused on the online advertising space is rapidly diminishing.

For this reason, we believe that the shares could receive a significant “scarcity premium” when introduced to the marketplace.

The letter goes on to make its case for the spin off - “We are confident that investors will appreciate the opportunity to buy shares in a “pure play” online advertising company that offers some of that sector’s most promising technologies.”

Taking a closer look at such an approach - it seems that the Valid Click technology alone has the potential to be a blockbuster revenue generator as more companies appreciate the need for click fraud protection in their online advertising campaigns as well as their affiliate marketing efforts. This patent pending “in the click stream" click fraud protection technology addresses the online advertising industry’s multi billion dollar“elephant in the corner” in an automated way that equitably serves the needs of both the ad networks and the advertiser.

We believe this technology is among the major reasons why Microsoft (MSFT), Yahoo (YHOO), Cnet (CNET), Intuit and others have recently chosen to implement some or all of the applications offered through THK’s network division. Further, we have heard much chatter about Microsoft’s beta testing of the Valid Click technology beyond their new affiliate program and that they could be about to use it for their pay per click advertiser network - adCenter.

This would be the biggest news in the history of Think Partnership, in that it would likely have a monumental impact on their bottom line in addition to pushing it ever closer to becoming the industry standard for addressing the click fraud issue. In summary, the we believe the IPO of shares in the Kowabunga unit would cause the market to have a greater appreciation of each division’s growth potential and that the Board of Director’s will likely give very serious consideration to this proposal.

Additionally, the opportunity to buy into the potential of these assets while they are still in their infancy in terms of monetization (Microsoft and Cnet implementations within the last month) represents unique value that would be very well received by investors. It will be very interesting to see how this stock trades if the company moves forward with the IPO. There has been a substantial and growing short interest (currently 1.25 million shares short) while the float in the stock has been increasingly acquired by large institutions, suggesting a major disconnect in how various investors perceive the future of THK.

With the possibility that THK could soon own shares of a high flying Nasdaq listed player in the online ad sector that are worth more than the entire company‘s current valuation, it appears that the shorts might be in the wrong place at the wrong time.

Disclosure: Author is long THK

THK 1-yr chart:

Comments

[Mack Wheaton]

Looks like the adcenter trial may already be underway, check out th July 5 entry.

adcenterblog.spaces.li.../

[gballard]

Mr. Gilliam...I have enjoyed your commentary on THK and LOCM and would to speak to you regarding my recent research report on THK. Please email me your preferred contact info at: [e-mail]