Is a Marchex Buyout in the Cards? Does It Matter?

Thursday's spike in volume (3x normal volume) and price (up over 10% mid morning) increase looks unusual against the backdrop of a terrible day for tech stocks and the overall market. I noticed there was no news from Marchex (MCHX) that would be a catalyst for such action so I did a little searching and found a few interesting things.

There has been some chatter in the last 48 hours about the possibility of a deal involving Marchex, including two different scenarios:

1) Management Lead Private Equity Buyout - talk of company offering something in the $15+ per share range to take the company private. Such a price could make some shareholders hopping mad, since the stock has traded that high within the last year.

Could management have gotten so frustrated with the Street's inability to properly value their company that they are going to buy it themselves?

Recent financings, VC placements and one upcoming IPO have accorded valuations to other large domain portfolio owners that greatly exceed Marchex's current valuation, in some cases valuing the domains at more than double the current market cap for Marchex. While it is difficult to make an "apples to apples" comparison of their respective domain portfolios, the breadth and depth of the Marchex domain portfolio and the direct navigation traffic it has consistently generated arguably places it among the most valuable domain portfolios and one would expect that to be reflected in the overall company's valuation.

Further evidence of the valuation disparity is the price paid for Quigo in their recent deal with AOL/TWX, which commentators have suggested might be as high as $380 million. This had to be an eye opener to management as to what kind of premium they might be able to command for their Industry Brains division. With a large stable of high profile clients (motley fool.com, entrepreneur.com, USAtoday, etc.) that would rival Quigo's, one could surmise that Industry Brains could command an even higher price than Quigo due to the scarcity factor alone. However, I do not believe management would be looking to dump Industry Brains to the highest bidder. It is entirely possible that management could choose instead to spin off Industry Brains in an IPO, thereby raising a couple hundred million earmarked for a war chest for future acquisitions while minting a new, more highly valued currency that would also enable more acquisitions. On its face, floating Industry Brains in an IPO seems to make a great deal of sense even if management does not take Marchex private.

2) Third Party buyout of Marchex - everyone is looking for News Corp. (NWS) to buy an ad network to better monetize MySpace, WSJ.com and the many online assets they have cobbled together, particularly in light of the fact that many of the Fox properties currently rely on Quigo for their contextual ad network and Murdoch might not want to continue with them now that they are owned by AOL/TWX.

A need for a company owned solution to better monetize its considerable traffic generating assets could be also be said for Interactive (IACI), the other name I see being tossed around. Each of these has the ability to pay the price that would likely be necessary to take down Marchex and each could create additional value by adding Marchex's large domain portfolio to their existing lineup of online properties. The question is how much would they be willing to pay and would it be enough for Marchex shareholders? I see some disconnect on that point in particular and have trouble envisioning either of these scenarios materializing.

Regardless whether any of these merger/takeover scenarios plays out, Marchex is in a very interesting place right now and the action we saw yesterday may be the Street's slow realization of what could transpire here. Given that the past couple of months have given us industry deals and VC funding that would suggest a valuation for either the domain portfolio or Industry Brains that is greater than Marchex's current market cap, investors at today's prices are possibly buying these assets at 50 cents on the dollar even without taking into account the company's $37 million net cash position.

One other thing that could be driving the volume and price - as of December 31 there were almost 10 million shares sold short. For a stock that only trades an average of only about 265,000 shares per day, a 10 million share short position is unheard of. That means that if the short sellers were to decide to "buy to cover" their positions, it would take nearly 40 trading days (8 weeks) where the entire volume each day was represented by purchases from the shorts buying to cover. This is a remarkable short ratio that could in itself attract a large number of investors who like to buy into the company simply on the recognition that there are so many shares that must be bought to cover. When situations like this occur, the "squeeze" on those short positions can often cause the stock to move substantially higher in a very short time frame. Would you buy a dollar for 50 cents if there was a chance you might get to sell it for two or three dollars in the near future? That is a possible scenario that could play out here regardless of whether any deal materializes.

Author is long MCHX.

Comments

[stone:]

this is an inaccurate account of Quigo vs. IndustryBrains. Quigo is a *much* larger business/company. You do your readers a disservice by writing things that are simply untrue. Question is: why are you doing it?

2008 Jan 19 03:37 PM