Short & Long Of It: USWeb’s $350M Stock Swap For CKS

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.

Looking at the deal itself, CKS working capital of $52 million could make
the buy feel more like $300 million for USWeb, as our abacus tweaking
reveals. Further, if we take the latest-quarter revenue for CKS and
annualize it, the result shows a 2x revenue deal multiple that USWeb values
CKSG at. USWeb’s 2x offer seems low in our view against that multiple.

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.

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.