Has ValueClick Cried Wolf Too Often?

Once again, rumors of a ValueClick, Inc. (NASDAQ: VCLK) takeover are circling through the marketplace. Recent Yahoo! (YHOO) / Microsoft (MSFT) talks made sure of that. VCLK even got a nice one-day uptick on the news, but yet again, the stock price has retreated to its recent $20-$21 area.

I know the world is talking about how VCLK is going to get snatched up at any moment. Perhaps even Microsoft out of desperation might be interested in stroking a big check? Google (GOOG), AOL (TWX), etc. – the list of prospective suitors goes on and on. I have even heard price targets from reputable sources in the $40-$60 range.

However, nobody ever seems to ask the question if VCLK is actually for sale or if there are any actual suitors. The stock price certainly seems to indicate that – or maybe the investment community got tired of hearing rumors that well, remained rumors until they vanished. Obviously, VCLK has yet to be acquired.

Of course, a buy out would not surprise me – that can possibly happen any time. And yes, Microsoft's willingness empty their bank account to buy Yahoo! slightly increases those odds during the short term. As for price of a buy out – who knows? $35? $45? $60? No offer higher or lower would surprise me.

From a greed standpoint, I would love to see a big buyout of VCLK as I am a long on the stock. However, I just do not see that as reality and here is why:

1. VCLK Rumors Abound. It is all talk. Nobody talked about the aQuantive buyout before it happened. If there is really a deal happening, there would be far less talk about it on the street.

2. Market Activity. VCLK stock is certainly not acting like a company about to get acquired. Stock ticks up occasionally on the rumors only to come right back down. If a real buy out offer was in the works, there would realistically be more upside pressure on the stock price.

3. FTC Issue. VCLK is currently in the midst of an FTC probe regarding some of its practices. While I believe this issue will be resolved and show favor on VCLK, it is unlikely someone is going to buy out a company where a big potential lawsuit liability is lying in the weeds.

4. VCLK Size. VCLK has a market cap of $2B. Incidentally, the $2B (or $3B-$5B to purchase VCLK) is likely too small to really be of interest to a Google, Yahoo!, or Time Warner. On the other side, they are too big to simply be scooped up.

5. VCLK Growth Strategy. VCLK has grown through the years by acquiring companies and 2007 was no exception. Certainly, they may be positioning themselves for a sale, but perhaps they are just trying to acquire businesses to grow their own cash flow base and build shareholder value.

6. Missed The Boat? If there were discussions with VCLK, they apparently did not come through. I am willing to bet that MSFT approached VCLK before they approached aQuantive. Maybe the aQuantive team were better deal makers? aQuantive is a 2nd rate solution in just about every aspect they offer when compared to VCLK, particularly in the affiliate marketing space through their Commission Junction [CJ] product. On a side note, I believe that CJ division is potentially worth more than VCLK’s entire market cap of $2B and that a spin-off of that unit is very possible, but the latter is simply an opinion.

I do, however, think that VCLK’s best opportunity to be acquired is through Google. Google, which has primarily offered pay-per-click advertising to its customers/advertisers is now experimenting with pay-for-performance advertising. That is, rather than giving Google $1 each time your ad is clicked by a viewer, you can offer to pay Google a commission on a product sale or for generating a lead. CJ, being the absolute leader in affiliate marketing with the appropriate technology and pricing would be a very natural fit for Google and give Google a huge inventory of pay-for-performance deals.

Of course, please note that most of the affiliates promoting CJ programs are already buying clicks in Google, so perhaps Google feels they are already squeezing enough juice out of this channel. On the other hand, Google could then theoretically go direct, become their own advertising network, and use their in-house knowledge of their search engine and paid placement spots to most effective promote the offers in CJ and not have to pay a middle man or share the bounty.

The affiliate marketing/CJ issue is admittedly a little confusing if you are not familiar with the space – and the investment community is not – and subsequently VCLK does not get the added marketplace premium potentially associated with this line of Internet marketing and advertising.

VCLK earnings come out shortly and will be closely watched and again having a suitor emerge the day of or the day after earnings would hardly surprise me. I just find it odd how nobody is asking “what if there are no suitors?” or “what if VCLK is not for sale?” There very well may be, but nobody is asking those questions, and usually, what is not known or asked is where you uncover the investment merits of a company and stock.

I like VCLK. I like their business model and their steps to produce cash flow and buy back stock. And of course, I like the prospects of a CJ spin-off or an outright sale of the entire CJ unit or even VCLK itself. Realistically, though, VCLK and the investment community has cried wolf too many times regarding a takeover. If there is one, nobody is going to see it coming.

Disclosure: Author has a long position in VCLK

Comments

[ShawnCollins]

> most of the affiliates promoting CJ programs are already buying clicks in Google

Do you have data to support this?

[tchannon]

Well, I do not have exact figures and that exact data would be impossible to retrieve as many CJ publishers would not share.

However, you can get a great feel for the landscape by searching Google for various terms and if you are familiar with the CJ linking structure, you will note that in many cases 25%-75% of the ad slots are CJ affiliates. Sometimes it is more or less depending on guidelines of the advertiser, but CJ affiliates will often rely heavily on Google and other paid search marketing to drive traffic.

It is not to say Google could not realize more revenue by going direct to CJ and use the pay-per-performance offers. However, Google is already realizing a fair amount of revenue that is derived from the CJ network.