Is Think Partnership More Valuable Than ValueClick?

Posted on May 22nd, 2007 with stocks: THK, VCLK

John Gilliam submits: There seems to be a great deal of interest in ValueClick (VCLK) today and many are suggesting that it could be a target for Microsoft ( MSFT), or perhaps one of the big players that wants to keep MSFT from buying VCLK.

On its face, such a deal makes sense, as MSFT has given us good evidence of their intent to be a player in this space with their $6 billion acquisition of AQNT. Additionally, the value in VCLK's assets are very complementary to the assets of aQuantive (AQNT), with very little overlap. Remember that these two almost merged last year for this very reason.

I believe that the $4 billion + price that would likely be necessary for a purchase of VCLK will make MSFT consider other alternatives, including a very small player in this space that has built a technology platform that has attracted some high profile customers, some whom have actually migrated from ValueClick.

Think Partnership (THK) has assets very similar to those ValueClick assets that would be so complementary to AQNT, primarily the Lead Generation business and the affiliate marketing platform. In each case, ValueClick's business is considerably larger than THK's, but I would submit to you that MSFT would find more value in a purchase of THK.

In the Lead Generation business, ValueClick is one of the largest players with its WebClients business. However, the practices in use at WebClients have attracted the ire of the Federal Trade Commission, as the company announced an FTC investigation of their practices just Friday. THK has a very strong and growing Lead gen business with its iLead subsidiary. The growth numbers are not as impressive the last couple of quarters because the company made a decision to eschew those practices that were attracting the negative FTC attention, but they appear to be back on track and growing again with their "white hat" approach. Its hard to imagine that MSFT or anyone else would want to buy into an FTC inquiry if they could get the lead gen platform without such negative exposure.

The Affiliate business is the other unique business ValueClick offers that would be complimentary to AQNT's business. ValueClick's affiliate platform has long been the leader in the affiliate marketing business. However, THK's "Kowabunga" division has developed a platform that many in the industry believe provides the best technology and the best value proposition. Recent happenings suggest that may be true. Yahoo recently chose the Kowabunga platform to power its affiliate business. Intuit was using the ValueClick affiliate platform, but migrated to THK's platform just a few months ago. Further, MSFT is launching a new affiliate program that will be using THK's Kowabunga platform - its live on the web as of Friday though it has not had the official launch yet. Thus, Microsoft, Yahoo and Intuit have recently had the opportunity to evaluate the players in the affiliate marketing space and each has ch! osen THK's Kowabunga platform over the VLCK platform.

One key asset owned by THK that has no comparable at VCLK or any other company is its proprietary click fraud prevention technology provided through its "ValidClick" subsidiary. The company owns the only "in the click stream" click fraud prevention technology currently in use. Microsoft and Interactive's Ask.com have been rumored to covet this technology as a value proposition differentiator for advertisers and publishers versus Google and Yahoo.

The ValidClick technology built out to a scale useable by large networks, its private label pay per click platform and its general availability to third parties for licensing are all fairly recent occurrences - it simply has not existed long enough to gain the traction necessary have a material impact on THK's financials. If MSFT or one of the bigger players decided they wanted to own this technology, now would be ! the time to buy it - before it becomes widely appreciated and ! before i t is monetized to its potential.

The bottom line is that a potential buyer doing their due diligence on ValueClick will likely stumble upon the Think Partnership comparisons. With the price tag of a ValueClick acquisition likely pushing well into the $4 Billion + range - one could surmise that they might consider investing $500 million - $600 million instead?

I cannot say at what price THK management (who own a large percentage of the shares outstanding), would sell the company. However, with its current market cap in the $200 million range, the recent deal valuations ranging from 1)TFSM at 31x 2007 EBITDA to the higher end of 2) AQNT at 45x 2007 EBITDA would place a value for THK in the $600 - $900 million range. It is hard to imagine that THK management would turn down the premium that MSFT or others might be willing to pay to own these assets

ValueClick Ad Practices Draw Regulatory Scrutiny

May 23, 2007

Dan Perrault, enticed by the promise of a free laptop computer, in February paid $300 for a dozen different products, including phone service from Vonage Holdings Corp. and monthly shipments of wine.

"I'm still using Vonage, and the wine isn't bad," says the 38-year-old Wisconsin physician. Trouble is, he has yet to receive the $1,100 computer. Mr. Perrault has repeatedly faxed his receipts to the promoter, Consumer Promotion Center, and complained to the Better Business Bureau. "At this point I've pretty much given up."

Consumer Promotion Center is part of ValueClick Inc., an online-advertising company with a highflying stock but some practices that are coming into a regulatory spotlight.

Companies that corral customer "leads" for clients through the use of aggressive tactics are being scrutinized by the Federal Trade Commission, the agency charged with enforcing truth-in-advertising laws. The FTC won't comment, but several people with knowledge of the situation say the agency is investigating following complaints from consumers and has been in contact with lead-generation companies, email marketers and advertisers.

If the FTC forces a change, a business that represents a third of ValueClick's revenue and has been a source of financial strength recently could be squeezed, according to Jordan Rohan, an analyst at RBC Capital Markets. Late last month, he predicted government scrutiny of the so-called incentivized lead-generation industry and recommended ValueClick investors sell their shares.

At the same time, ValueClick's shares have been pushed up by an M&A frenzy in its industry. Big Internet companies are snapping up online-advertising businesses in a wave of takeovers, including Microsoft Corp.'s deal last week to buy aQuantive Inc. for $6 billion. The prospects of further deals has caused the price of ValueClick stock to rocket, even after it confirmed Friday that it is the subject of an FTC probe.

"Specifically, the FTC is investigating certain ValueClick Web sites which promise consumers a free gift of substantial value, and the manner in which the company drives traffic to such Web sites, in particular through e-mail," the company said in a regulatory filing. ValueClick said that prior to receiving the May 16 letter, it wasn't aware of any pending or planned FTC investigation related to the company's lead-generation activities.

"The company continues to believe that it is compliant with all current state and federal regulations pertaining to its lead generation activities, and intends to fully cooperate with the FTC in connection with this inquiry," ValueClick said.

ValueClick fell as low as $26.06 in the week following the company's May 1 quarterly earnings report and a conference call where questions about its lead-generation business overshadowed better-than-expected results.

But the stock is now at a 52-week high after speculation that it could be an acquisition target, despite warnings from some analysts that the FTC cloud could reduce its takeover appeal. The stock surged 7.6% Friday, then logged another 14% gain on Monday and climbed 2% yesterday to close at $35 in 4 p.m. Nasdaq Stock Market trading.

ValueClick's business could be hurt if government scrutiny of the industry forces changes or scares away advertising clients and publishers who distribute its ads. ValueClick is paid by clients only for customer leads it produces. Moreover, ValueClick shareholders could be harmed if questions turn off potential acquirers.

In addition to the Microsoft-aQuantive deal, Google Inc. grabbed DoubleClick Inc., and WPP Group PLC announced plans to acquire 24/7 Real Media Inc. ValueClick, which has technology for showing online ads and offers services to both advertisers and Web publishers, has been considered a potential takeover target.

The FTC appears to be concerned primarily with disclosures that promoters provide on Web sites and in emails to consumers.

"If you make a representation that something is free, but a person has to spend hundreds of dollars" to get it and that requirement hasn't been disclosed adequately, "that's standard, or basic, advertising law that that claim may be deceptive," said Lois Greisman, associate director of the FTC's division of marketing practices.

ValueClick has said its disclosures comply with all federal and state guidelines and industry best practices. Representatives who responded to complaints to the Better Business Bureau have argued consumers were told upfront that they had to respond to a certain number of offers -- and, in some cases, refer a friend who also responds to offers -- to collect their free prizes, which can run the gamut from diamond-encrusted pink cellphones to trips to Las Vegas.

Gary Almond, vice president of the Los Angeles Better Business Bureau, contends that terms of Consumer Promotion Center's offers aren't properly disclosed. "This is not free. It's conditional, and the conditions aren't fully disclosed," he says. "I think it's misleading."

Consumers who were wooed by ValueClick promotions, through emails and online ads, were required to visit multiple Web pages where they chose among sets of offers and steadily wracked up bills. In the final step, Mr. Perrault said, his only alternative to joining Vonage and the wine club was to apply for a car loan -- suggesting a car purchase was necessary. He said he was also asked to fill out multiple surveys that asked for detailed information about his interests, income and family.

"These tactics... prey on users who are confused or naive or just a little too trusting," says Ben Edelman, a lawyer and expert on the online-advertising business.

Last year, ValueClick settled a trademark lawsuit filed by Wal-Mart Stores Inc. over ads promising free $500 Wal-Mart shopping cards. Though the settlement terms weren't disclosed, court records show ValueClick agreed to cease using Wal-Mart's name in its advertising. Wal-Mart declined to comment.