Monday's announcement of the merger between Perion Network Ltd. (Nasdaq:PERI: TASE:PERI) and the Conduit Ltd. Client Connect unit solved one mystery about the latter, when it disclosed its business results, but it also raised new questions. In April 2012, Conduit was valued at $1.4 billion - double the valuation of its core business (toolbars) for the purpose the merger.
Conduit's valuation was not media speculation, but stated in an official document by JPMorgan Chase & Co., which acquired Yozma Venture Capital's 7% stake in Conduit for $100 million. Monday's merger valued Conduit's core Client Connect business at $650-700 million, on the basis of Perion's share price yesterday. Where has half of Conduit's value vanished in less than 18 months?
Anyone who thinks that this is growth which stagnated or technology that has lost its legitimacy did not listen to Perion's conference call following the merger announcement. It turns out that Conduit had 45-50% growth in the first half of 2013. Most of the product mix of its Client Connect business, whose main product was a toolbar, comes from new products, such as applications for tightening user-content provider ties, as Conduit describes it.
In addition to Conduit's large dividends in 2012, and the valuation of its business that is not part of the Perion merger, there are two main reasons for the loss in value. First, the merger was made at a multiple of 7-8 on the earnings before interest, taxes, depreciation and amortization (EBITDA), which gives Conduit's unit a value of $700 million. This is a much lower multiple than the multiple given the business two years ago, which was a multiple of 12 on the operating profit. Changes in the advertising market caused by constraints imposed by Google Inc. (Nasdaq: GOOG), the market's main search engine and source of revenue, on companies which redirect users greatly reduced their value.
Another point is that Perion, the entity remaining after the merger, knows how to acquire companies. After 14 acquisitions in the past few years, it's a tough negotiator and acquired Conduit's activity without a control premium for Conduit's shareholders. Union Bank analyst Benny Dekel notes that this could affect the pending merger between two Israeli download giants Babylon Ltd. (TASE:BBYL) and ironSource Ltd. in Babylon's favor.
Behind the scenes growth engines
Where will Perion and Conduit go from here? Perion now has two divisions: searches, which, like Conduit's business, earn revenue from redirecting users to search engines; and proprietary products, such as Incredimail, additions to user's content. The companies complement each other with search and online ad optimization solutions, but the future could send them in a completely different direction.
The infrastructures underpinning the two companies are based on high-speed big data analysis engines. Both companies have built up huge databases, which due to the shortage of resources and attention to other growth engines, have not been expressed. The merger will enable the joint company to provide an online marketing and advertising tool based on smart analysis of consumer behavior - capabilities that are in demand by the leading companies in the business.
Published by Globes [online], Israel business news - www.globes-online.com - on September 17, 2013
© Copyright of Globes Publisher Itonut (1983) Ltd. 2013