On the eve of the joint presentation of partners IBM and Kit Digital (KITD) at the myNAB Show in Las Vegas, investors looking for the next potential premium buyout candidate in technology should look closely at evidence that points to the possibility that Kit Digital is being approached by potential suitors and could likely be the next acquisition target in the growing cloud-based video asset management industry.
With a just reported record of 102% year over year revenue growth, 2012 guidance of $25-$35 million of free cash flow, and a company client base of 2,450 (as of December 31, 2011) which includes some of the world's biggest brands like Airbus, AT&T (T), Disney-ABC (DIS), FedEx (FDX), Google (GOOG), HP (HPQ), New Corp., and Universal Studios to name a few, you can see why a larger company or private equity would want to acquire Kit Digital.
The recent clues to draw investors to this buyout speculation include quotes from Kit Digital management, analyst commentary, and the attractive current valuation of KITD relative to its peers.
#1 Clue: Kit Digital Management's Actions and Public Comments of former Chairman
Investors, analysts and the financial press got their first clue of a possible purchase of Kit Digital on February 27 when the company issued preliminary full year results and updated guidance. In that press release, we learned that due to the recent inquiries about acquisition of the company, a strategic transaction committee was established to review all offers. Then CEO and former Chairman Isaza Tuzman said,
As we have previously disclosed, we have from time to time received expressions of interest concerning significant investment in, and possible purchase of, our company. Due to recent inquiries and conversations, in January our board established a strategic transaction committee of independent directors to allow for responsible and efficient review of such opportunities as they arise.
As a matter of fact, the recent repositioning of the management and board provides another big clue that KITD is preparing to more thoughtfully consider acquisition offers. In the press release that explained the shifts within the company, then-Chairman Tuzman said,
The shift to full-time chairman is a step I have been contemplating for some time. The strategic transaction process, which is underway at the direction of the board's Special Transaction Committee, is at a pace that requires my dedicated focus and energy, separate to the day-to-day running of the company and investor relations responsibilities. By moving forward today with Barak as our interim CEO, we have built in some structural flexibility over the coming months as we assess strategic options.
(The sudden news of Chairman Tuzman's resignation Monday leads me to speculate that his departure is part of this ongoing process to restructure leadership as part of this strategic transaction process. With nothing more from the company in the after-hours press release, speculation is all we can do at this point on this development.)
#2 Clue: KITD Analysts Commentary
Over the last few weeks, there has been a flurry of analyst commentary regarding the possible buyout scenarios of Kit Digital by a larger company. While this buyout commentary would be noteworthy if it was only one analyst, the fact that multiple analysts have made recent comments is extremely significant.
According to Roth Capital analyst Richare Ingrassia's communications with management and independent checks as reported by Bloomberg,
A resignation last week of four board members paves the way for a takeover, with possible bidders being private equity buyers and listed companies.
And Cyrrus AS brokerage in the Czech Republic (Kit Digital's operational headquarters location) agrees based on comments by analyst Onjrej Moravansky,
We also believe it is quite probable that Kit Digital will sooner or later become the target of a takeover, which would represent a major impulse for the stock price.
Finally, JMP Securities analyst Mark Harding thinks the Kit Digital, "could go private or be bought out by a larger company," according a recent report by Reuters.
The most recent analyst activity and price target changes in the past month include:
Upside Potential ($7.00/share cost basis)
#3 Clue: Major Undervaluation Based on Peer Review
The final reason Kit Digital is an attractive, possible buyout candidate is because of its current, major undervaluation based on peer comparison and its growth guidance.
KITD's most notable competitor is Brightcove (BCOV), a company which also provides cloud-based solutions to support publishing and distributing digital media. BCOV went public on February 17 and currently holds a market cap of nearly $500 million. Only two weeks ago, Brightcove traded at a market cap of $650 million. For a company with that much market value, you would expect to see huge revenues. But, BCOV only has trailing revenues of $63 million (FY 2011), putting its current valuation at nearly 8X revenues.
In comparison, KITD has a current market cap of $341 million with trailing revenues of $214 million, an increase of 102% over their 2010 annual revenues of $106 million. Therefore, KITD is currently priced at an extremely cheap valuation of 1.5X revenues. Kit Digital's estimated revenue for Q1 2012 ($72 million) is nearly as much as Brightcove's estimated full year revenue for 2012 of $78 million.
And, Kit Digital's year over year revenue growth estimates for 2012 are double those of Brightcove (25%-BCOV vs. 52%-KITD YoY growth).
FY 2011 Revenue
Valuation (X revenue)
FY 2012 Revenue (estimate)
Valuation (X revenue)
YoY Revenue Growth Estimate (2011 to 2012)
For investors seeking profits by investing in a company that is a possible premium takeover target, the last month has presented major clues that Kit Digital is being pursued as an acquisition target. With only the recent comments from KITD's former Chairman and the analysts, Kit Digital is worth adding to your watchlist.
But based on the cheap valuation of KITD (1.5X trailing revenues) to its competitor, BCOV (8X trailing revenue), if KITD were awarded a price at only half of BCOV's value, or 4X trailing revenues, Kit Digital would be priced at $18/ share. The current undervaluation of KITD has led me to not only add to my watchlist but also to add the stock to my portfolio as a speculative takeover target.
The key word is speculative as the company is definitely in a transition period with their board and management. We should know more in the days ahead and potentially more Tuesday when Kit Digital and IBM share the stage together as partners in a session titled, "The Journey to Smarter Commerce and Social Engagement."
Disclosure: I am long KITD.