End of A Promotional Marketing Era

Public companies have many rules regulating how they conduct business, for many that means not just reporting revenue but also disclosing transactions of a certain nature. At the beginning of this week, one of the few publicly traded companies with a long-history in the performance marketing space made such an announcement. The company was ValueClick, owners and operators of a large display ad network and Commission Junction, among other significant assets. Just how many assets is hard to quantify exactly, but since going public in March of 2000, the company has had at least 14 rather sizable acquisitions, with one of the largest being Webclients. Those operating in the performance marketing space for any appreciable amount of time know Webclients. From the powerhouse of marketing start-ups that is their hometown of Harrisburg, Pennsylvania, WebClients became one of the largest in the promotional space, attracting the attention of ValueClick, who in June of 2005 purchased the company for $141 million. (Interestingly, on that same day, ValueClick also announced an equally unpredictable acquisition choice, E-Babylon, the parent company to 123Inkjets.com.) Fast forward four and a half years later, and the ValueClick empire is now minus one acquisition – WebClients – announcing earlier this week that it has sold the promotional marketing company for $45 million to an undisclosed buyer (it was not The Useful).

That ValueClick would have even bought WebClients I would not have guessed. For a company trying to elevate itself in the eyes of the media world, adding WebClients could look like a step backwards. In 2005, promotional incentive ads certainly ruled the remnant display landscape and inboxes everywhere; but, for a public company with a mandate to court brand advertisers, aligning themselves closer with a higher risk and lower brow form of marketing did not seem to make sense. The more logical conclusion is that the purchase of WebClients had nothing to do with how the company expected the broader market to perceive it. They didn’t seem to care about their own brand perception, relying instead on judgment by their financials. The safe assumption states that promotional ads most likely comprised a decent chunk of their inventory at that time, whereby they found themselves inadvertently relying on that revenue, so taking it in-house had distinct advantages. For one, instead of getting paid some percentage of revenue, by owning WebClients, they could earn all the revenue. ValueClick, too, had a larger sales staff among other resources, which they could leverage to increase the profitability and efficiency of the existing WebClients business. And, for two years, the acquisition looked like a well placed bet. Under ValueClick’s ownership, WebClients saw staggering growth, with estimates placing its annual revenue contribution close to if not greater than $200 million in 2007.

Unfortunately for ValueClick, the tremendous success of the WebClient’s promotional business brought not altogether unanticipated scrutiny to the company as user backlash to the promotional space grew and questions surrounding email rose. As one of the largest and only public company in the promotional space, they took the brunt of that backlash, which included an investigation by the FTC. While the promotional business continued to thrive after the FTC investigation ended, the reputational risk that existed from the outset started to drag on the company, keeping that piece of the business in the spotlight even after the legal spotlight ended. Combined with the eventual slowing of the promotions business, the promotional piece of the business, became a financial risk. Every slight mistake or earnings miss by that group weighed down the entire company even if it outperformed the market as a whole. For ValueClick to move on as a company, they had to move past the promotional business which had come to define the company as a whole in a disproportionate manner. Getting rid of WebClients certainly made sense, but outside of bankers in the know, I doubt many others expected it to actually happen. The price too might comes as a slight surprise – $45 million, roughly $100 million less than they paid for the company, and according Valueclick’s filing, "The proceeds from the sale of $45 million consist of a five year note receivable bearing interest at the rate of five percent, with monthly payments amortized over a ten year period and a balloon payment at the end of the fifth year."

If you follow the promotional space today, you can almost understand the logic of having a private WebClients. A public company can’t compete in a space defined by gray. With the challenges facing the continuity space, the incentive space is enjoying a slight resurgence, but that doesn’t mean it has gotten easier to generate the traffic. There is simply no way that as a public company, ValueClick could risk getting ensnared in the ongoing trend of poor marketing tactics, e.g., "Apple wants you to have a Free iPad." The downside to a private WebClients is what it means for the promotional space. It is yet another blow to an industry that isn’t without value and an industry that plays a big role in other marketing segments online, from continuity to phone-based lead generation. To outsiders, they see an asset that dropped in value over time, as opposed to a cash machine that helped the company post impressive earnings. It also sets a benchmark for valuing the existing players, at a much lower amount than any would want or have hoped to sell. For better and worse, what plays out in the public perception of the promotional space won’t impact the operations of the space as we know it. The three to four major players will continue to churn out offers and arbitragers will continue to leverage them like internet advertising duct tape. It is for now though, an end of era. The offers will still work, but those running the businesses will have to wait some time before the luster of operating such a business returns. There is always a chance that being off the radar could in theory speed that process up.