Short & Long Of It: USWeb's $350M Stock Swap For CKS
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Wall Street apparently doesn't think much of USWeb's $350 million, or $21.21 per share, stock swap of 1.5 shares of USWB for each share of CKS Group reinvents anything as the two firm's stock prices are down, USWB almost 30%, since the deal was announced September 2.
Perhaps one of the bigger concerns was the renaming of the two firms as "Reinvent Communications." USWeb, by many accounts, is a far stronger name and CKS was always an awkward one that told investors little of what the firm does. Reinvent may describe what the two are doing but as the corporate masthead it doesn't seem like a strong marketing play.
Still, the deal may make sense long term past the name game, as the market for integrated Web marketing and technology systems solutions could exceed $7 billion next year and growing. The combined company could be one of, if not the leaders in that market.
The pooling of interest transaction puts Reinvent Communications as one of the leading providers of the newfangled world of Web technology and marketing services to corporations. USWB shareholders will own 65% of the pro forma company which serves 44 of the Fortune 100.
While first blush seems to indicate that USWeb paid a premium, recall that CKSG shares have traded in the Rodney Dangerfield space of stocks that get no respect.
CKSG hasn't come back since shares dropped a phenomenal 63% in one day last November on earnings weakness (see ISR November 11 - click here). Translation: In our view USWeb paid a premium to current value but not historical. CKSG revenue has been fairly strong and its shares traded as high as $46.25 per share the past year.
USWeb's Offer For CKS Group
|Reinvent Communications||USWeb||CKS Group|
|Fully-diluted shares out||50.0||16.5|
|Share price Sept 3||$ 10.19||$ 13.25|
|Market capitalization||$ 509.38||$ 218.63|
|USWB offer for CKSG||$ 350.0|
|CKS Group long-term debt||$ -|
|CKS Group working capital||$ 52.3|
|Effective offer||$ 297.7|
|Effective net offer per CKSG share||$ 18.05|
|Share price pre-deal Sept 1||$ 14.44||$ 14.13|
|Sept 3 share price difference||-29%||-6%|
|52-week high||$ 38.75||$ 46.25|
|52-week low||$ 7.06||$ 11.38|
|Latest quarter sales||$ 25.2||$ 39.8|
|Latest quarter net income (loss)||$ (60.9)||$ 2.9|
|Annualized sales||$ 101.0||$ 159.2|
|Mkt cap to annualized revenue||5.0||1.4|
|Deal revenue multiple||2.2|
|Effective deal multiple||1.9|
(c) 1998 Mecklermedia (NASDAQ:MECK)
Meanwhile, USWeb (NASDAQ:USWB) has been on a shopping spree as long as we can recall. CKS will be its 34th acquisition. USWeb president and COO Toby Corey told us the deal will make one of the strongest Internet systems integrators, with 1,800 combined employees in 6 countries. About half of those are engineers, half are creative with sprinkles of strategy people throughout.
Combined annualized sales exceed $250 million. USWB alone trades at a much better revenue multiple than CKSG today, 5x vs. 1.4x for CKSG. Reinvent's combined market cap, held at closing values September 3 for each stock, implied $728 million. If the Street meets the new combined stock at 3x sales that implies a $780 million market cap. If held at USWB's 5x revenue, multiple pro forma market cap could exceed $1 billion. To get there we think "Reinvent" will have to prove to Wall Street and Web street that it really has done just that.
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