Wall Street Errs In Its Punishment of Scripps (SSP)

Scripps'(SSP) announcement of its intention to acquire U.K.-based comparison shopping provider uSwitch for $366 million last week has not done wonders for its share price. Since the announcement, Scripps shares have fallen approximately 6%, closing yesterday just above its 52 week low at $45.10. Part of this decline is attributable to Merrill Lynch analyst Lauren Fine's downgrade of the stock in which she wrote:

SSP already owns Shopzilla, one of the leading comparison shopping sites in the US and, to date, has enjoyed tremendous financial success top and bottom line as well as solid traffic trends. We would have expected them to leverage this technology geographically or to other areas of comparison shopping rather than make a hefty acquisition to enter a new area of comparison shopping. The business model is different as revenues are generated by commissions from service providers to whom uSwitch delivers new customers.

Brian Smith, ComparisonEngines analyst, questions Fine's logic:

There’s still a LONG way to go with comparison shopping or as it will eventually be called, shopping search (a URL which Shopzilla smartly owns). Shopzilla makes 30-40% of its revenue from Google Adsense ads (according to recent SSP filings). To me, this means that people are searching for products which Shopzilla doesn’t have in its database and therefore clicking on Google Adsense ads.

Shopzilla and everyone else in the space has a long way to go to cover the long tail - Shopzilla shouldn’t need Google Adsense ads if the company is doing shopping search well. If these shopping comparison engines are getting feeds from just 5,000 merchants, they are sorely missing out on the total e-commerce universe. Yes, Shopzilla is crawling and the company says it offers products from over 70,000 sites, but 70,000 merchants is a small percentage if the pool of shopping sites is 1,000,000 and growing every day.

That’s why it makes sense for Shopzilla to stick to its guns and continue exclusively with shopping search. If it wants to get into lead gen (lending, cars, home phone providers, online education) or travel search, it can partner...

I’m surprised Ms. Fine isn’t applauding this deal as uSwitch is expected to grow revenues by 80% year over year. As I said in a previous post, “the smart old school media companies have realized that online services are the future and the candidate pool for profitable, established companies is getting slim. And if Scripps can leverage its network for uSwitch and UpMyStreet the same way it leveraged its network for Shopzilla, this deal will not look expensive for that long.�?

Which leads me back to the question of strategic fit. Yes, Shopzilla could eventually build out uSwitch services, but that’s the wrong move if it wants to remain the king of shopping search.

Look at this deal as an old media company with incredible assets making moves to ensure the company can survive, compete, and post the same growth numbers as companies like Experian and IAC as well as media conglomerates like FOX, Disney, and Viacom which are picking up high growth assets to offset a tough outlook for growth in the traditional areas of Media 1.0.

SSP 5 Day Performance