As anticipated, this year has brought
no shortage of investment activity into our space. Just last
week, for example CGI Holding Corp – not to be confused
with the famous dot com bomb CMGI – d/b/a Think Partnership
(AMEX: THX) announced its intent to acquire the six man
group of PrimaryAds. Think Partnership has been actively
purchasing companies operating in the online advertising
space, such as online dating site Cherish.com and technology
firm Kowabunga, who is best known for their
MyAffiliateProgram and Kolimbo affiliate network based on
users of MyAffiliateProgram. This week’s Trends takes
a closer look at Think Partnerships pending acquisition of
PrimaryAds, addresses some of the rumblings to be heard
surrounding the deal, and pieces together the new face of
Think Partnership.
https://www.lynxtrack.com/signup.php
The press release
discloses; “Think Partnership intends to acquire all of the
stock of PrimaryAds in exchange for $10 million in cash. The
shareholders of PrimaryAds can also earn up to $3 million in
additional cash and up to $13 million of common stock of
(Think Partnership), contingent upon the aggregate pre-tax
income of PrimaryAds during the first twelve full calendar
quarters following the closing of the merger achieving
levels ranging from $6.5 million to $20 million. (Think
Partnership) also plans to issue to stockholders and
employees of PrimaryAds options to purchase an undisclosed
number of shares of common stock of (Think Partnership).”
Most importantly one could argue the merger is expected to
be immediately accretive to the earnings of Think. As Gerard
M. Jacobs, the Think Partnership’s CEO, states, “We expect
that, at its current run rate, PrimaryAds will add $4
million or more to our annual pre-tax income, and therefore
we expect that the shareholders of PrimaryAds will earn most
if not all of the $16 million earnout portion of the merger
consideration."
The question on many
peoples’ minds though was, “Why PrimaryAds?” Started in
November 2003, they are not only new but lack many assets
assumed to be behind most acquisitions and investments in
our space. PrimaryAds owns no inventory of their own, has no
exclusive advertisers, nor do they have any proprietary
technology. The case could easily be made that they are
nothing more than brokers, offering very little of the
all-important value-add. If that is the case, why would a
public company use up much of its free cash to buy something
so tenuous? At risk of oversimplification, the answer is
money. PrimaryAds has an efficient, profitable business that
has exceeded market growth, and barring no industry-wide
changes, will continue to outperform.
As mentioned above, in the eyes
of many in the space, the PrimaryAds deal seems questionable
given their lack of ownership on the inventory, advertiser,
and technology fronts. What’s more is that some have
asserted PrimaryAds revenues rely on relationships with
companies operating in the contentious adware space, such as
180Solutions, a statement implying that PrimaryAds’ business
is both non-substantiated and non-sustainable. A behind the
scenes peak into their operations would show otherwise.
PrimaryAds did work with 180Solutions but terminated its
relationship at the same time that Commission Junction
terminated theirs with 180 Solutions. As former webmasters
and affiliates, the founders of PrimaryAds place the
greatest importance on the affiliate relationships both in
quality of publisher and in quality of service provided.
PrimaryAds focuses on doing the right thing and has earned
praise from all who work with them. Given that, along with
the due diligence Think no doubt performed, the choice of
PrimaryAds makes sense, including additional reasons
discussed below.
Through this
deal and other recent deals, Think Partnership has rather
quietly begun to build a well-rounded business in the online
advertising space. Their core subsidiary prior to the recent
mergers and acquisitions was a self-described leader in
search engine optimization and pay-per-click campaign
management. With the acquisition of PrimaryAds though, they
expand into the lucrative world of affiliate marketing and
have acquired a company that offers many cross subsidiary
synergies. For example, PrimaryAds offers a new client base
for the aforementioned search engine optimization arm. The
deal also gives Think a distribution outlet for its online
dating site Cherish and a potential exclusive advertiser for
PrimaryAds. Closing the loop, Think’s purchase of Kowabunga
answers the lack of proprietary technology argument often
mentioned in the PrimaryAds purchase. It also gives Think
and PrimaryAds a backup in case either decides not to use
the current DirectTrack platform. And, as mentioned above,
PrimaryAds grows Think’s bottom line… substantially. That is
why sometimes a purchase can be “about the money, stupid.”
In this case though, the purchase is about more than money.
It is about a diversified business and both companies
deserve credit.
In its own
way, the PrimaryAds acquisition is more exciting than recent
funding received by perennial favorite AzoogleAds or even
the mammoth acquisition of Advertising.com by AOL. The
reason for the excitement is that it paves the way for other
successful businesses who are just that… successful. Unlike
the dot com era where valuation was based on technology
alone or a perceived good idea to “leverage the power of the
internet,” this deal sends the signal that our space has
started to mature and operate closer to the real world where
bottom line growth through acquisition is not only
acceptable but an often followed strategy. This deal gives
justification to all those companies who chose to operate as
companies and not as dreams and suggests their hard work
will pay off even further. And now that companies, in this
case an ad network, without proprietary technology or other
traditional assets are not only a viable business but are
worthy of capital activity. The question now is, who will
be next in the consolidation game? As this trend happens it
will unfortunately mean few options for publishers. Yet
consolidation also tends to breed new options in related
areas. This is exactly what we see happening in the
contextual side of the ad network space and the focus of
this week’s Digital Thoughts.
