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EXCITING NEWS: Quasar CA Has Merged Into CoRise

We are delighted to partner with such accomplished professionals, and excited to offer additional services to our clients.  Please visit our new website for more information about the company, our new partners, and our services suite.

We look forward to working with you,
Robert S. Peck, CFA - Managing Partner
October 1, 2011

Defending Yahoo's Roy Boystock


The chants for the head of Yahoo’s board (Roy Boystock) have been growing louder over the last week since CEO Carol Bartz’ firing.  It’s understandable, as investors and tech constituents alike look for more heads to roll to either: see someone put in place to finally turn Yahoo around, or see the equity maximized as the company is sold.  This post is hard for me, as I haven’t been happy with the board either.  As an investor, I have been burned many times by Yahoo: lack luster “Panama” integration, lack of promised realization form the APT platform, the lack of buying Facebook for $1b, the infamous rejection of Microsoft’s takeover offer, lack of Asian asset optimization, and the more recent lack of true turnaround progress under Carol Bartz. I was never Carol’s biggest fan (as she facetiously threatened to choke me for asking a tough question in an investor meeting).  Let me clarify this though, as this is NOT a post meant to bash Carol Bartz.  I actually have a lot of respect for her and think she can be a good CEO, but it would have to be in the right situation.  When she was announced as the new CEO of Yahoo, I groaned.  Not because I didn’t like her past achievements or respect her, but because I just didn’t think she was the right future leader for Yahoo.  Yahoo needed someone who understood media, advertising needs, general technology trends, global partners, and more specifically the emerging trends in Internet: local, mobile, social, video (or the “4 O’s” as she later coined them).  She did eventually learn these trends, but it was too late and not strong enough.  

So I presume some would deduce that the board should be to blame (and Roy Boystock more specifically, as he was the one purported to woo Ms Bartz).  While I agree that the board should share some of the blame, they are merely a proxy for the owners of Yahoo: the shareholders.   The shareholders own the company; they ratify the big decisions or the can fire the board members if they aren’t happy with the decisions being made.  Yet large share holders didn’t challenge the Bartz hiring; moreover, in the last shareholder vote, they APPROVED all board members (including Mr Boystock!!).  Some will argue that while Mr Boystock was approved, it was at a lower margin.  HOWEVER, of the ~930m votes actively cast, 753m voted to reinstate Roy Boystock (and Carol Bartz actually had 10m more “yes” votes than Mr Bostock).  So, the board & Carol Bartz were reappointed – ie the owners of the company decided that the people they were paying to oversee management (along wit the CEO) were doing a good job.  The board, and Mr Boystock, must have therefore walked away thinking that while they had their issues, the owners of the company generally approved of the work they had done.  If shareholders were so unhappy, how could this be?

Many will say that shareholders get lazy or that they get too close to management to truly make active (vs passive) decisions.  Many funds also avoid being active because they don’t want to be in the press.  That’s why the stock market needs “activists” like Dan Loeb’s Third Point, which has accumulated a recent ~5% of the company.  He has voiced disappointment and given suggestions for a new board.  Maybe he will be successful in raising further support by other large share holders – maybe he wont (ie Carl Icahn wasn’t successful).  

However, if shareholders were historically disappointed by Yahoo’s results and management of the company, they really can only place the blame in one place – on themselves.  It’s time for the owners of the company to share the blame on the sputtering of Yahoo.  Hopefully they an be instrumental in reinvigorating the future of the company.

Yahoo Board Options, aside from a Sale

I was interviewed by DigiDaily (http://www.digidaydaily.com/stories/why-yahoo-s-next-ceo-should-be-from-nyc-not-the-valley/) on what I thought Yahoo's board should be doing next.  Many believe that the only way out for Yahoo is to break the company up and sell it to maximize the value.  While I have long been a supporter of rationalizing some of the undervalued pieces (primarily the Asian assets), I  think the board has more than one option.  If they decide  NOT to sell the company and reinvigorate management, they need a true online media leader who is also tech savvy.  Carol was none of these things, although she did serve her purpose of streamlining some of Yahoo's assets.  Many argue that Yahoo! is merely a media property and hence an old media executive could be brought in to guide the company's future.  I think this is over simplified and not the correct direction for the company.  In my opinion Yahoo! is a tech driven media company, and as such, it needs a leader that not only understands media & advertisers, but the fundamental underlying tech trends that will set the tone of the Internet for the next 3-5 years.  Hence, a leader must have a media AND tech vision of where things going.  Much like Wayne Gretsky's famous quote "skate to where the puck is going, not where it is".  Media is becoming more "transactional" in nature, and the old days of merely putting up a digital billboard without tangible ROI is fleeting.  The tech vision must account for mobile (phones and tablets), local, social and video.  It should be global, and key acquisitions & partnerships should be established..now.  I believe there are a handful of execs that can fit this role (D. Rosenblatt, Phil Shiller, Tom Evans, J. Killar, J. Dorsey, Jon Miller, Vic Gundotra,  and a few more), but shareholders and the board would need to have patience to let the visionary put his / her finger prints on the company.

Again, while many assume that Yahoo! must sell the company, I think there's more than one direction for the board to go.  The company has a great balance sheet and a lot of option value that in the right hands, may provide more value that a mere sale.....

Bob Peck
Quasar Capital Advisors

Beyond Search post on Patent Research firm Article One Partners

I recently read a post on Beyond Search Beyond Search - Patent Research, that discusses an article on PatentPoints.com about patent research being best left to professionals.  Patents are hot, in the news everywhere, and extremely valuable / lucrative.  This can be seen in the Apple consortium's buy of the Nortel patents or in Forbes.com 's article on Google's recent interest in Interdigital Forbes on Google - Interdigital

There is a lot of money to be made and lost in patents, if the process is not handle as completely as possible (for example RIM's >$600m purchase of patents that ended up mostly being invalid.  So while I think Mr. Arnold does a good job talking about the value of thorough patent research and need to use the resources of professionals, I don't think he goes far enough in his argument.  While he cites Article One Partners (AOP), I don't think he emphasizes enough the incremental value added by  a large crowd sourcing outfit like AOP.  Being able to tap into a million researchers that search not only English but foreign documents, coupled with charts and tables and other non-text prior art searches is invaluable in my mind.  I honestly don't see why even the largest patent attorneys wouldn't want to supplement their prior art searches with a company like AOP.  The incremental spend vs. the amount of money at risk isn't even close - it my view, it should be part of every patent firm's fiduciary duty - otherwise, the patent research just isn't complete.

TheCardLine.com - new PrePaid credit card information

The economy seems in bad shape.  Weak manufacturing numbers, high unemployment, and questions on weather the whole Globe is about to go through a big period of deceleration or potentially recession.  With the current economic turmoil roiling the markets, we have sponsored some free information of a safe asset class for consumers: PrePaid Credit Cards.  The website www.TheCardLine.com The Card Line is filled with helpful information for consumers looking at this as an option to help manage their expenses. 

Take a visit over to The Card Line- we hope it provides some helpful information and we welcome any feedback.

QCA Team

Some SEO Caution for HomeAway (AWAY) IPO



We’ve seen a good amount of Internet IPOs come through over the last few months with LinkedIn, Bankrate, Renren, and Pandora.  Now the next IPO is set to launch with HomeAway.  I believe investors will be positively inclined to this stock as it is an industry leader in a large market with room to grow.  The IPO should value the company around $2b.  

However, recently I have been in contact with some very bright people over at Digital Due Diligence  (http://www.digitalduediligenceadvisors.com/).   They have a particularly expertise in link analysis and part of their claim to fame was pointing out some of the questionable tactics that JC Penney was using to get traffic – ultimately JC Penney was reprimanded by Google and was invisible in search results for a period of time (http://www.nytimes.com/2011/02/13/business/13search.html).  DDD has been very helpful in my reviewing of recent IPOs.  So, when they pinged me recently to give me their thoughts on HomeAway, I paid attention.  Overall, HomeAway looks like a very solid property from an SEO (search engine optimization) perspective.  However, points out a few SEO issues for investors to be aware of:

1) Multiple HomeAway-owned websites rank highly for the same competitive keywords, thus increasing the odds that people land on their network of sites.  This is not necessarily a bad thing – infact it’s what SEO strives for

2) HomeAway continues to use paid links (which is against Google’s guidelines – see Google’s post: http://www.google.com/support/webmasters/bin/answer.py?answer=66736) – to be clear, “paid links” doesn’t mean AdWords, it means paying another website to link to you (which should help your site in the Google algorithm).  Should Google decide to penalize them, we could see the natural search ranking impacted, which would impact their traffic

3) The Real Problem - The combination of #1 and #2 means that if any penalty from Google were to occur, HomeAway's fall from the search results page would be worse than just one site being demoted, it would be multiple sites.

What are some examples of Paid Links?  In their analysis of HomeAway’s Lake Tahoe page, reveals external links from
1)    Guidebook America (http://www.guidebookamerica.com/), which overtly sells links here: www.guidebookamerica.com/add/index.htm
2)  
 My Pet Friendly Cabin (http://www.mypetfriendlycabin.com/one/north-lake-tahoe.html), which sells links here: (http://www.mypetfriendlycabin.com/my-cabin-rates.html)
3)    Scottsdale.com (www.scottsdale.com/media%20kit/MediaKit.Scottsdale.com.PDF)  which also sells links.
DDD even contacted another website (http://www.homosassaflorida.com/) that had odd links to HomeAway and were told “Local links are $100 per year. Call me if you’re interested.”

To be clear, while DDD thinks that HomeAway is using some black hat techniques to a degree to drive a portion of its traffic, to assess magnitude more analysis needs to be done.  DDD is unsure of any absolute impact should google adjust, but it does want to point out potential risks to investors in case the next Panda swipe by Google (where it penalizes sites with some poor quality links) hits near term traffic.  Further its important to point out that Google’s algorithm is well aware of this and automatically reduces the value of those links to the SEO ranking – so there may be no impact to traffic.  However, Google could also do a manual penalty to adjust – its unclear.  Nonetheless, DDD does a good job making sure that investors are aware of the issue – it’s worth hearing what they’ve got to say.  

My Interview with HighGainBlog

I was recently interviewed by Stephen Arnold from Beyond Search in a piece he did for HighGainBlog (http://highgainblog.com/2011/06/exclusive-interview-robert-peck-quasar-capital-advisors/).  Below, is the text from that interview:

Exclusive Interview: Robert Peck, Quasar Capital Advisors

28 June 2011

On June 14, 2011, I read “Getting a Great Rate—Why I’m Buying the BankkRate IPO”. Several ideas crossed my mind. First, I was in general agreement with the upside for a company that makes once, hard-to-find financial foundation data easily available. Pro or average citizen benefits when key metrics are easily available.

Second, Mr. Peck correctly identified some soft spots in the current IPO marshland. He said:

As we saw with some other Internet companies during the infamous Panda changes from Google, search engine results can have a large impact on a website’s traffic.  Bankrate gets 80-90 percent of its traffic for free (that is, not having to pay for links), and about 50 percent of that comes from search engine optimization.  Should Google somehow change its algorithm or other competition improves its rankings compared to Bankrate, then that could prove negative to RATE.

Frankly, I did not think that Mr. Peck was sufficiently aggressive in stating this risk. Across my own information network, I see how arbitrary changes in Web indexing methods can have significant effects on traffic. One example that one information service disappeared from one US vendor’s index while the same service rose to a top ranking on the new Chinese-friendly Jike.com search system. Many Web sites have lost control of their destiny as certain search engines mix human fiddling with “layers’ of code that wrap 1998-style indexing in an effort to achieve “efficiency.” I want to be clear. I agree with Mr. Peck in broad terms, but I think the degree of risk is sufficiently high to warrant additional caveats in a business sector in which Comenius Vanderbilt would be quite comfortable.

Armed with my close reading of his analysis of Bankrate, a promising online information service, I met with him in the cavernous lobby of the hotel adjacent Grand Central Station. (Thank you, Mr. Vanderbilt for providing a Google-scale setting for my conversation with Bob Peck.)

image

Robert Peck, CFA, institutional investor and Wall Street Journal ranked analyst, Columbia MBA. Mr. Peck is the managing partner at Quasar Capital Advisors

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The full text of the interview appears below.

The Interview

Arnold: Bob, thank you for taking the time to meet with me. What’s the focus of your new business.

Peck: No, thank you, Steve. I have been quite busy with Quasar, which is the name of my new company.

I thought you were at Baron Funds.

Yes, after I left BearStearns in early 2008, I wanted to work in a different business sector. I had been immersed in the interesting but volatile Internet sector for a number of years. Baron gave me the opportunity to broaden my work into other aspects of technology and media”, which was both challenging and refreshing.

significant projects which was both challenging and refreshing.

So what’s the focus of Quasar?

I kept close watch on some of the new business opportunities that were becoming evident where the Wild West of the Internet was intersecting with more traditional businesses. The burgeoning growth of the iPhone and android mobile ecosystems were tremendous for the Internet, as web sites became more accessible for people on the go.  Apps only amplified the robustness of Web offerings and expanded the reach of Internet companies”

Give me an example.

Sure. You have one example in your hand. The Apple iPad is an exemplary product, and it has made clear that the Internet, consumers, and retail can be combined in what seems to be a category killer. I wanted to work in that type of confluent opportunity space. I needed a new vehicle to explore the intersection points that were being created by companies like Apple and other firms.

Okay, on my iPad I see this statement about Quasar: “Our vision is to leverage our long Internet and Technology industry experience, to provide premium strategic and financial consulting services in the Internet industry, helping our clients attain their corporate goals.” That does not sound like railroads meet the BlackBerry Playbook to me.

I can see your point. However, I see tremendous opportunities for a mobile device company which can infuse its traditional product with what I call “intersection opportunities.” BlackBerry may not be the poster child for this revolution, but other companies are. I am following closing some interesting developments in financial information and consumer services, for instance.

Can you give me some color about that opportunity space?

Yes, I see you have a print out of my Business Insider piece. As you know, I think Bankrate looks like an interesting opportunity. I identified several characteristics. Although I was talking about Bankrate, my observations provide an indication of the attributes my analysts and I are tracking.

Okay, let’s take a couple. You say, “Bankrate’s collection of sites make it #1 in insurance, credit cards, mortgages, and deposits.  It is the clear leader, paring up top advertisers with good leads.  The value of its leads is demonstrated in its scheduled 10-20 percent price increase the company is passing through next month, with no push back from advertising clients…This leading group of sites is run by a strong and seasoned team.  CEO Tom Evans is highly respected and has been leading the company since 2004.  CFO Ed DiMaria has been the CFO for five years; and Mikey Ricciardelli is an online marketing veteran having joined the company over five years ago.” Aren’t we talking about raising rates and having some savvy people at the top?

That’s part of my analysis. What’s happening at Bankrate is three important things. First, companies that are not encountering ad softness have an advantage over the companies that have to use an iron fist to grow. Bankrate is being pulled forward. Second, the company is not one site or one service. I like the notion of a “portal approach” combined with the laser focus of a vertical. Companies that can slice and dice the market have an advantage over “everything is a nail” operation. Finally, people are more important than technology right now. When a company has a solid management team, I know that technology is another item to be managed in a creative, healthy way. A firm that chases the 18 year old at an engineering school in Germany is looking for a silver bullet, not a business.

That’s fair. However, I want to push back a bit. Financial services no matter how one cosmeticizes the sector is crowded, chaotic, and under intense scrutiny. Aren’t their less problematic zones of confluence?

Sure, but the company that can bring coherence to a problematic area can win big. That’s what I think Bankrate has a chance to do. The opportunity is just that much bigger in a huge space like the ones Bankrate serves.

Let’s shift gears. Google is now in Microsoft’s anti-competitive hot seat. The most contentious action Google has taken in the last two years has been what’s now called Panda. What happens if Panda erodes traffic for sites that have a heavy dependence on Google?

I agree. Panda can make life difficult for many sites that get caught in the Panda tripwires. However, I applaud Google for taking actions that ultimately will force some Internet sites to improve quality.

However, as you know, some sites either though intentional or unintentional actions will lose traffic. If those sites are dependent on Google advertising, revenue will be lost. The damages can be in the hundreds of millions.

For some companies which are unable to adapt, bankruptcy is a potential outcome.

In the financial services sector, not just the narrow Bankrate case we were discussing a moment ago, isn’t “findability” a big challenge. What
must a company offering online financial service do to maintain its brand?

That’s a tough question. Different firms manifest different challenges. There is no one-size-fits-all solution.

Stepping back, financial services companies have to provide the quality of service their customers expect. A Web site has to be able to perform well on two vectors; for example:

  1. A solid user experience. Some consultants call this the UX or user experience. For me, the public facing presence has to be easy to use whether a Web site or an iPad application. A lousy experience will chew up the firm’s bottom-line more quickly than a year ago, for instance.
  2. Quality leads to advertisers. There is some talk about declining efficiency of certain online advertising methods. If these rumors prove to be true, then the Web site or app must find a way to deliver results. For a $20,000 online ad spend, the Web site must deliver more than $20,000 in actual value. My view is that such efficiency analyses are going to have to move from the superficial Excel chart school of thinking to a more robust, sophisticated approach.

Is that an area in which your firm is working?

At this point, I want to say that we are exploring new modeling and quantitative approaches. I can’t say much more than that, however.

I understand. Some what’s your work in this area suggest?

Okay, one quick observation. If you can’t be found, you don’t exist. This does not apply only to Google. It applies to Baidu and Yandex as well as the French system from Dassault Exalead. The split today is 50 percent of traffic is organic and the other 50 percent from SEO. If Panda tips the equation, you can see the cost implications of having to pay for clicks.

Let’s explore that idea. How do companies deal with the shift from key word search, traditional 1998 style searching, and Google’s 65 percent plus share of the online search market?

Remember Darwin?

Sure.

Web sites must adapt to Google’s changes. Web site must optimize for Bing. So, bottom line: “Adapt or die”

What happens to the existing business models of companies which have minimal marketing traction in non Google channels?

I think that it is now time for Web sites to find ways to diversify away from Google. This will be painful because for 12 or 13 years, many companies have grown fat and lazy riding in the free traffic bumper car of Google search.

Now multiple marketing channels are needed.

What are the financial implications of this shift?

I mentioned the challenges to online ad revenue. But there will be margin compression as well. Adept firms can gain a competitive edge by capitalizing on this shift. Time may be shorter than some believe. The wild card, of course, are the legal challenges to Google as well as in other adjacent sectors such as the Apple Samsung mobile issue and Oracle’s activities in open source software.

Could Google make changes in its shift to mobile that could trigger a domino effect of falling revenues in companies which exist to “surf on Google?”

I don’t want to convey any negative about Google or any other Web indexing service. Let me take a broader view. I think that Web search is declining. It won’t go away but it is falling behind mobile search.

And mobile search is different. The form factor is different. The use cases are different. The type of information the user requires is different despite some broad, general similarities.

Across a number of demographics, mobile information access is growing faster. With fast growth and a larger user base, mobile is becoming more important to businesses.

I am interested in companies that appear to have a way to capitalize on this phase change in information access. The highest value companies will grow with this opportunity or risk falling behind.

Optimization of opportunity is key.

How do stakeholders prevent this type of risk? Call Quasar Capital Advisors?

I am delighted you said that. Thank you for the commercial.

Seriously the shareholders must make sure their companies are aware of the changes and trends, with large amounts of revenue being generated via SEO, taking advantage of the trends becomes paramount for portfolio companies.

Thank you for taking time to talk. Before you go, any financial tips you can give me?

Sure, read my articles in Business Insider and other publications. We have a new information service coming soon. And, no, I can’t provide any details.

Stephen E Arnold for HighGainBlog.com, June 28, 2011



Getting a Great RATE – Why I’m Buying the BankRate IPO

BankRate, (the #1 online site for mortgages, insurance, credit cards and deposits), is back.  After having gone private in August 2009, the company is now set to emerge publically with a stronger set of assets, a more robust income statement and better prospects.  The company has its set of Pros and Cons (described below), but overall, the IPO seems attractive, with the stock likely worth twice as much within 3 years.  I plan on going long RATE, and here’s why…

First, The Risks in the BankRate Story
There are always many risks with any new equity, but I don’t see anything too glaring with BankRate.  This list is not supposed to be exhaustive, but more emblematic of the top issues in my mind:

Risk #1.  Economy.  By far the #1 risk (as we learned in late 2008 /early 2009) is the general economy.  If consumers are shying away from various financial products (mortgages, credit cards, etc), then advertisers will scale back.  Further, as we saw back then, even if some consumers wanted products, sometimes the banks had limited balance sheets, and only the absolute best consumers could get offers.  I can’t predict where the financial markets are going, but this is a risk to keep in mind.

Risk #2. Poor Quality Competition.
   As we recently saw with QuinStreet, increased competition from lower quality lead aggregation sites, can take share cheaply.  However, they typically provide lower quality leads, which usually takes the advertisers a little time to process that “they get what they pay for” (ie low conversion of consumers and hence lower ROIs).   BankRate, being the top site, provides quality leads for its advertising customers – the fact that RATE CEO has talked about 10-20% increase in pricing and have gotten no pushback, that’s a good sign as to the quality of leads BankRate is providing.

Risk #3.  Search Engine Changes.  As we saw with some other Internet companies during the infamous Panda changes from Google, search engine results can have a large impact on a website’s traffic.  BankRate gets 80-90% of its traffic for free (ie not having to pay for links), and about 50% of that comes from search engine optimization.  Should Google somehow change its algorithym or other competition improves its rankings compared to BankRate, then that could prove negative to RATE.


Second, The Pros in the BankRate Story
Pro #1 – Top Site, Large Markets  & Top Management.  BankRate’s collection of sites make it #1 in insurance, credit cards, mortgages, and deposits.  It is the clear leader, paring up top advertisers with good leads.  The value of its leads is demonstrated in its scheduled 10-20% price increase the company is passing through next month, with no push back from advertising clients.  Moreover, this leading position is well situated to penetrate the several large target markets (Insurance is a ~$1Trillion market, as is credit cards; home loan market is a $14 trillion  market and the deposit market is over $9 trn).  Further, this leading group of sites is run by a strong and seasoned team.  CEO Tom Evans is highly respected and has been leading the company since 2004.  CFO Ed DiMaria has been the CFO for 5 years; and Mikey Ricciardelli is an online marketing veteran having joined the company over 5 years ago.

Pro #2 – Revenue  Mix.   The type of ad revenues on BankRate are much different than on other sites that are supported by advertising.  Most other sites are paid by CPMs (showing banner ads).  For BankRate, less than 10% of its ad revenues are generated this way, and that is shrinking each year.  BankRate’s ad revenues are more performance based (cost per lead (~50%+), cost per click (~15%), and cost per approved transaction (i.e. credit cards ~25%).  Because these revenues are more performance based, they should be more protected in a downturn.

Pro #3 – Margin Growth & Improving Financials.  There is a lot of leverage to the BankRate model, and with growing revenues, the EBITDA margin line should expand from ~30% intot he higher mid 30%s.  The exact level will be predicated on the amount of investment the company does for new products and incremental growth.  This margin expansion should allow for faster bottom line growth, building cash (the company should have ~$50m post IPO), and further strengthening the balance sheet (~$200m of debt post deal), or allowing for accretive acquisitions.


Lastly, Let’s Take a Closer Look at Valuation
Taking the mid point of the offering range ($14-16 per share), BankRate (RATE) appears to have an Enterprise Value of ~$1.65b and could be viewed a little rich at 14x this year’s EBITDA and 31x this year’s earnings.  However, the company is growing strongly organically (i.e. adjusting for the acquisitions historically).  While this year ~$390m of revenues should grow almost 30%, they are estimated to grow well above 20% as well and likely hover in that range for the near term.  This strong growth is due to the double-digit growth of online advertising that is expected, BankRate’s leading status, and the rolling out of new products in the near future.    So to get a better gauge of BankRate’s valuation, it’s best to look at some of the forward multiples over the next few years.  Looking at next year, we can see the offering price values the company at ~11x EBITDA and a PE of 21x.  This is reasonable given the 20% growth the company should achieve on the bottom line.

In fact, if we applied a 24x forward multiple on the earnings and free cash flow, and a 13x forward multiple on EBITDA, I can see the stock being worth more ~$23 by the end of next year.  That would represent ~50% upside in 18 months.  Below I look at the three important valuation criteria (EPS, FCF, EBITDA), while adjusting the assumed multiples for each metric to give a range (I highlight the center column as my base case, but one can see where the equity value can go based on different multiples).

Moreover, if I decreased my multiple a point as I roll my target out and see what the stock could be worth in 30 months (i.e. my PE multiple is now 23 instead of 24, and my EBITDA multiple is 12x instead of 13x),  I can see how the stock can go to ~$27 by that time.   This would represent a compounded return of  25% over that time frame – very robust for any investor.

Lastly, in investing in IPOs, I like to see a path to where I can double my money in three years.  If I look to where the stock can be at the end of 2014, I can see it worth more than $30, a double for my money and a Compounded Annual Growth Rate (CAGR) of >20%.  That’s a great return for any fund.  Hence, I like this investment for me.

Summing it all up, while any company tied to the financial markets will have economic risk, I think the collection of leading assets, market opportunity, top leadership, strong financials, and a attractive valuation make BankRate’s reintroduction to the public markets a successful one.


AOL: “Analyst Day” = AOL in Play

AOL: “Analyst Day” = AOL in Play
As a strategic advisor to clients, I am constantly evaluating the Internet landscape and one conclusion I’ve reached recently is that next week’s AOL analyst day puts AOL in play…period.  The analyst day that is coming up next week  is the defining event in the company’s recent history in my opinion: either the company can convince investors that it sees a path to profitable growth or it can’t.  With the former, investors could get behind the stock, driving it higher; while with the later, the Bears likely press shorts, making AOL’s market value too cheap to core asset value for Strategic / Financial players to pass up.  Either way, I think investors win by owning the stock before analyst day.   

Below I’ve listed my Top 10 items that I think CEO Tim Armstrong and AOL must address in their first analyst day since being spun out from Time Warner.  At <$20, the stock is languishing almost 20% below is spin price (~$23) and time is running out.  I think AOL needs to address the below concerns to give investors confidence that Tim has the company headed in the right direction -  and just as importantly, that he also has the recognition and willingness to sell or break up the company if it appears his strategy isn’t proceeding as hoped.  Tim Armstrong in only 40 years old, and I would have to believe that a stand alone $2b market cap company CEO isn’t his swan song.  Making investors money by building his vision or seeing a high value strategic alternative will be critical to the future careers of him and his top management.  I think its likely that one of Eric Schmidt’s dubbed “Gang of 4” ultimately acquires AOL to leverage what they want; given current prices, any of these acquirers can take the assets they want for free, while selling off what they don’t need (explained more below).

So having said all of that, here is my view on what AOL needs to address next week at their analyst day:

1)    Emphatic Clarity on the Leadership – There has been some concern that AOL is no longer solely Tim’s company, and that Arianna may be better positioned long term to run the company.  I think it must be clear that this is Tim’s company – investors invested in him and his vision.  Arianna is a strong and powerful ally to Tim, but it should be made clear who’s the boss.  Further, Tim should clearly articulate to investors what he thinks AOL is today, where he’s steering the company, and what’s the correct strategy to get there.  Ultimately he should re-assure investors that they are investing in him, and that he is trying to maximize the value of the assets he was given (which could entail selling the company or breaking off pieces).  In the end, whether AOL succeeds in its plans or fails, Tim should ultimately be the one judged.  My view is that Tim is intelligent, aggressive, and focused on either building the premier online asset, or maximizing shareholder wealth through asset sales if his growth plans look untenable – he must underscore that he will be a good steward of shareholders capital and avoid “hail Mary acquisitions”.

2)    Show Path of Core Display Growth and Profitability
– The core display business is the key to what Tim is trying to turn around.  Not only is AOL trying to grow core domestic display, but the unit hemorrhages a ton of cash each year (>$300m this yr including Search).  The company needs to provide a roadmap for investors on how AOL can achieve market double digit topline growth rates, and how it can do so profitably.  How long should it be before AOL can reach healthy growth at industry margins?  And if it can’t grow profitably, is it best to break up the company now and sell off the pieces to maximize value and avoid wasting cash.  What are the metrics that investors should be looking for to indicate progress?

3)    Monetize Access and use the cash to build the Vision – In my opinion, its time for the company to sell the access business, and given the financial firms I’ve spoke to, there’s interest.  I also hear that there’s nothing technological that would prevent the split; in fact, as part of this, AOL could structure the deal to the likely buyers with agreements to still point the traffic to AOL.com for a certain period of time – this would help alleviate any traffic ramifications.  Also, AOL should retain co- rights to the customer data, which can be used to sell ancillary services, or even provide a payments platform.  As for what to do with the proceeds, Tim could use the cash to purchase more premium content prudently (maybe something in his 80/80/80 “local, women, influencer” mandate) – this should accelerate the turnaround, as well as alleviate the continuous negative comps that the declining access business causes.  Lastly, it would shine a spot light on the core businesses and force them to be more profitable.

4)    Patch Revenue Potential and path to Profitability Should be sketched out.  One of the biggest overhangs on the stock is the Bearish view that the company is spending ~$160m per year on Patch, which is generating negligible revenue and is extremely unprofitable.   While most investors are willing to concede that Patch is in an investment mode, many question remain as to whether it can ever be profitable.  I think management needs to show a more clear path on how the revenues can build and the potential profitability of this unit as it scales, instead of merely suggesting “a rolling thunder” of Patches turning profitable by year end.

5)    Acknowledge Seed de-emphasis – While the wild success of Seed would have been a great outcome, probably the second best outcome is acknowledging that it’s not working the way management wanted and hence  they are prudently scaling back investment.  If this is wrong, then the opposite should be done – shine a spot light on the success of the division, as it has been noticeably absent in recent addresses.  Acknowledging the de-emphasis of an underperforming business gives extra credibility to management, if they show they wont waste investors capital on low probability / challenged products.

6)    Discuss International Growth – The Street is aware that AOL pared back its unprofitable geographies, but now with a stronger / heartier AOL with the addition of Huff Po, AOL should articulate what markets it could reenter and when.  How big can these markets be overtime and why should AOL be successful there?

7)    Alliances – Jack Ma.  Jack Ma, the head of the dominant Alibaba Group in China is powerful, ambitious and looking to shape the future.  The disputes between their 40%+ partner (Yahoo) are legendary and Alibaba is ripe for change.  Tim should be lining up with Jack in multiple arenas: cross geography trade, advertising, and payments.  Bigger picture, I still believe Jack & Tim paired with some Private Equity money could do what many have speculated for years: merge AOL into Yahoo.  It’d be win / win for everyone: Jack finally gets control of Yahoo and can enter the US market; Tim gets a larger platform to operate with more scale and the resources to be the dominant online property; Carol (yahoo! Ceo) succeeds in getting her shareholders their returns; and the shareholders finally make money on Yahoo!

8)    Alliances – The Gang of Four. 
As Eric Schmidt identified recently, there is “The Gang of 4” in technology: Google, Apple, Facebook, and Amazon.   AOL should be in discussions with all four players (in addition to other players) for significant partnerships and a potential acquisition.  The company should be leveraging each player off the other, and given its tiny $2b market cap, is an easy acquisition by any of these players.

A.    Google. 
Don’t forget that Tim (and a bunch of Sr staff) came from Google, but since Google historically has avoided is own content (ex YouTube), one might think that there may not be as much to do here; however, Google has moved more towards content recently (ITA, Places, Music) and there could be room here to partner in several key areas like Mapping (does AOL really need to be a principal in mapping?), Payments (AOL’s deep credit card database could augment Google’s NFC payment efforts), Mobile (AIM could provide the base to compete with Blackberry Messenger for Android) , and local (the ~1000 towns of Patches can provide instant access to local sales forces and Google’s Groupon-like project “Offers”.  Important to note that there could also be synergies  with Google’s Doubleclick and AOL’s Ad.com / Ad Tech AG.  Lastly, AOL has a lot of data on its 4m+ subscribers and we all know how much Google loves data.  Also, AOL should pursue any areas where it could leverage Google’s massive infrastructure, where AOL could benefit from scale and pare back some of the losses in display.

B.    Apple -  Least likely probably is a deal with Apple, as Apple typically like to go it alone.  However there are some areas where the companies could work more closely together, including mobile (AIM and key properties built in on iOS – or could Apple move away from Google maps to MapQuest?), using iAds across all AOL apps, marketing Apple products to AOL’s subs, social content for Ping (AIM, .aol addresses).  I place a low probability on Apple acquiring AOL, but there is some obvious room to work more closely together.

C.    Facebook – This one to me seems like the best fit, let me tell you why.  Facebook has an amazing amount of data for people and their social graph, but it is lacking in general type content, which could keep users around longer on Facebook.  A content sharing arrangement could therefore be beneficial as Facebook could leverage AOL’s content to become the “Social Portal” – the 1 website with all your personal and general content needs.  The size and scale would catapult AOL into the top tier of advertiser meetings (which are currently mostly designated to just Google, Facebook, and Yahoo!).  Further, Facebook and AOL could also more tightly integrate their communications platforms leveraging scale and cutting back costs.   The treasure trove of credit card information AOL already has could accelerate FB credits utilization.  AOL could also leverage Facebook’s international presence, as AOL looks to rebuild globally.  

D.    Amazon – There is clearly some value in various types of Amazon / AOL deals.  Amazon would ideally like to add the ~3.7m subscribers & credit cards that AOL has on file to its base of customers for quicker buying.   Further, what if the ~70m AOL Media users were actually able to search for Amazon inventory without having ever left AOL?  Additionally, Amazon’s Web Services massive scale could readily reduce some of the technology costs for AOL.  Further, Amazon’s Living Social could benefit from Patch’s local sales force.  Lastly, content optimized for the Kindle could provide further opportunities.

9.    Not one of the “Gang of 4”, but….Microsoft – I have long thought that a spin of MSN from Microsoft with a balance sheet (say ~$10b to handle the ~$3b annual annual operating loss rate of MSN) would make perfect sense to merge into AOL.  In this scenario, the company could fund 2 years of losses, buy AOL for ~$3b and still have a $1b left over for cushion to turn the unit around.  They would have tremendous online reach, and Tim would have a bigger platform to run (display and search!).  Microsoft share holders would be excited to see the money losing unit gone and off their hands, while investors who wanted exposure to search and online advertising would get a larger vehicle to bet on.  For whatever reason, the scenario just doesn’t appear to be what Microsoft is focused on.

10.    AOL CAN BE BOUGHT FOR “FREE”
- AOL’s Value is small and could easily be digested by any of the above partners.  AOL is only ~$2b market cap company.  Assuming one of the larger players above was intrigued, they could pay a 50% premium to the current $2b market cap ($3b) and force the board to bring it to shareholders.  Shareholders would be happy they made a good return; Tim and his management team would be happy to run a larger platform & know they made their shareholders money; and the buyer gets a unbelievable steal – lets see why:

    Assuming a ~$3b purchase price of AOL
                       -$1.25b for selling the Access business
                       - $700m of cash by year’s end
                       - $100m for selling Map Quest (don’t need to be principal)
                       - $200m for Advertising.com (Don’t need to be a principal)
                       - $200m for AIM (someone like Facebook would just port users over)
                       - $200m for AdTech AG ad serving technology (don’t need to be principal)
                       - $100m for remaining real estate assets
                       - $100m left in tax shields from Bebo
                       - $100m tax shield value from Netscape (admittedly very conservative)
                       -----------------------
                       ~$3 of non-core sellable assets
= The Buyer gets ALL of AOL’s core properties + the Google search deal for FREE
     
Hence, I think there are many positive outcomes for AOL share holders if you believe in management taking the prudent steps and can have a long enough time frame.  It is hard to imagine AOL as a stand alone entity and with cheap credit, the time is ripe for someone to buy the company for “Free”.

My only concern is management doesn’t address the top 10 issues, and the stock continues to tread water.  However, that can only last for so long….

Robert Peck, Managing Partner
Quasar Capital Advisors
“Advising companies on the best ways to access and deploy their capital”

Disclosure: I am long AOL

          

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