by David Shabelman
[Posted on September 27, 2007 - 3:15 PM]
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DiggIt's rare that a firm with bulletin board-traded stock picks off a Nasdaq company, but it happened Thursday when mobile entertainment company New Motion Inc. agreed to buy interactive marketing company Traffix Inc. in a deal originally valued at $159 million.
Shareholders of Pearl River, N.Y., Traffix are set to receive 0.683 of a share of New Motion for every share of Traffix they own. At that exchange rate, shares of Traffix were valued at $10.59 based on New Motion's closing price of $15.50 a share on Wednesday, more than double Traffix's closing price of $4.76 on Wednesday. Traffix shareholders will own 45% of the merged company.
After dropping as low as $13 a share early in Thursday's session, shares of New Motion righted themselves in the afternoon and were trading at $14.85 ahead of the close. At that price, shares of Traffix were valued at $10.14, or $152.5 million.
Yet Traffix shares were trading at $6.48 late in the day, a huge spread to their value based on trading in New Motion. Part of the discrepancy could be attributed to the illiquidity of New Motion, a bulletin-board stock that trades an average of 1,000 shares a day. "There's probably few people that make a market in New Motion and follow it," said Tom Taulli, author of "The Complete M&A Handbook."
Irvine, Calif.-based New Motion provides mobile content directly to consumers through MobileSidewalk, which delivers sports and entertainment content, games through its GatorArcade channel, ringtones through its Ringtone Channel and mobile auctions through its Bid4prizes channel. In May, the company changed its name from MPLC Inc. to New Motion and conducted a 300-to-1 reverse split of its stock.
Traffix was established in 1993 under the name Quintel Communications Inc. as a direct marketing company that used television, mail and telemarketing. The company went public in 1995. It repositioned itself as an online marketing company in 2000 at the height of the Internet boom, via the acquisition of online sweepstakes company GroupLotto.com. Traffix provides online marketing and advertising services through its own Web sites, search optimization, affiliated networks and e-mail as well as direct-to-consumer sales.
According to the companies, revenues of the combined entity in 2008 will be between $145 million and $160 million, assuming completion of the transaction by the end of 2007. For the first six months of 2007, New Motion reported a net loss of $1.3 million on revenues of $12.5 million, while Traffix reported net income of $2.1 million on revenues of $37.8 million for the six-month period.
Michael Shonstrom, analyst with Emerging Growth Equities Ltd., argued Traffix's valuation was not excessive considering the premium placed on online marketing companies following several high-profile acquisitions earlier this year. Among those is the pending $3.1 billion acquisition of DoubleClick Inc. by Google Inc., Microsoft Corp.'s $6 billion purchase of aQuantive Inc., WPP Group plc's $649 million acquisition of 24/7 Real Media Inc. and Yahoo! Inc.'s $680 million acquisition of Right Media Inc.
"If you look at the valuations that have gone on in the marketplace and that every marketing company has been acquired, they've all been sucked up at high valuations," Shonstrom said.
