ValueClick (VCLK) – Part 2 – Developing Synergy Among Different Businesses

Since ValueClick’s inception, the intent was to cater to the long tail of the Internet. The CPC model was introduced at low rates to sell unsold inventory on publisher’s websites. This proved to be a compelling business proposition for publishers as otherwise the inventory would remain unsold. Advertisers on their part appreciated the value in having to pay only if the user clicks (performance based model) as opposed to having to pay per the number of impressions served (CPM). The company’s display ad network was born out of this harmonious concept.

A number of value-added initiatives were added to the company’s core expertise in display ad network over the years including Display Ad Media, Lead Generation (email & vertical sites), and Comparison Shopping sites. En masse they represent the ValueClick media business unit, which generates more than 70% of ValueClick’s revenue.

The core display ad network does have one major issue looming regarding the viability and sustainability of growth going forward. As individual publisher websites gain popularity, they tend to manage their own ad management rather than continuing with the Display Ad Media product from ValueClick. Hence the business growth depends on an ever-expanding long tail. This limitation will cause the business to run into a brick wall sooner than later.

ValueClick’s acquisitions indicate their due diligence in adding value to their network to mitigate the risks associated with the viability of long-term growth. Reach attained in the number of unique users is the standard performance measure for this business niche. ValueClick is #2 behind Time Warner’s Advertising.com by this measure. This ranking and the vast inventory of available ad impressions along with the recent foray into behavioral targeting positions the company to provide advertisers with a very flexible system. Signing up and holding on to bigger accounts (publishers) is a tougher hurdle. Efforts to retain such customers include providing them with a portfolio of services such as flexible options in video, co-registration, and cost-per-action, promotional and cost-per-sale.

The Be Free and Commission Junction acquisitions are representative of the company’s effort in securing more of the ad market from the rear of the long tail of the Internet – a very large number of very low volume publishers. These businesses have shown good organic growth recently. The success of those acquisitions can be attributed to management anticipating the exponential number of small publishers that came online in the last few years. A significant number of these publishers signed up for advertising from affiliated marketing partners.

Another focus area in ValueClick’s acquisitions has been in expanding their presence in the Display Ad Serving value chain. The Webclients acquisition represents the company’s entry into the publishing space primarily to generate leads. A relatively small capital was also committed to garner an eCommerce retail presence through the acquisition of eBabylon. PriceRunner and the most recent Mezimedia acquisitions are efforts at expanding further into the publishing space and being able to provide retail advertisers with an in-house option for Ads. These new initiatives should drive sizable growth assuming management executes well.

The 3rd part of this article will look at the company’s valuation, risks, and the investment outlook.

ValueClick Analysis:

1. Part 1 - Accretive Acquisitions Driving Growth.
2. Part 2 - Developing Synergy Among Different Businesses.
3. Part 3 - Business Issues.