Buying Sales Caliber through Acquisition

MediaAlpha is for sale. Quinstreet should buy them.

In recent posts I have been describing the value of a diverse customer sales distribution to investors. Caliber (aka sustainability) is the inverse of business Risk. If customer sales distributions of the two companies are combined, what Caliber is the resulting business? How would investors feel about an acquisition? Likewise, would an acquisition increase the supply Caliber of the business?

Imagine that MediaAlpha is worth 1.5 x Sales. They recently reported sales of $250M, so value would be about $400M. Given their largest business is auto insurance which is fragmented and with fewer than 10 customers (carriers), customer concentration will reduce the Sales Caliber of the business. Their business value is also constrained by limited supply of traffic resulting a a given supply Risk and Supply Caliber. Like most media companies they probably have little value of Plant and Equipment on their books. If Quinstreet bought MediaAlpha most of the acquisition would be booked as “intangible assets” or Goodwill. Could Doug Valenti, CEO of Quinstreet, put $400M on his Balance Sheet as Goodwill and make investors happy? Let look at some numbers:

Quinstreet (QNST) market value (on 8/3/2018, at time this was written) is about $675M and Sales of about $300M for a sales multiple of 2.25. They hold $80M in Net Tangible Assets on their Balance Sheet (last quarter). It seems that from QNST’s sales multiple of 2.25 is a strong reason to purchase MediaAlpha. As 2.25 X $250M = $560M

The hidden value will be the resulting company Sales Caliber and Supply Caliber. I do not know the sales distributions of either company, nor do I know their Supply distributions. But the treasure of value might well be any additive effect of the combined Sales distribution and any new sources of Supply. (Supply Caliber is low in the online media business with few sources as large as Google.) A couple years back, Doug made a deft acquisition of supply for $10M from AllWebLeads, increasing his Supply Caliber. If Sales Risk and Supply Risk are reduced, then investors will applaud loudly!

Maximum Sales Caliber of 8 carriers is only 3 bits. Caliber of a flat sales distribution to 8 clients is log2 (8) = 3 bits. My guess is that MediaAlpha has a Sales Caliber of 1.5 bits and QNST has 1.8 bits. Combined Sales Caliber might be 2.2 which is a huge increase in sustainability (reduction in risk). Similar Caliber increase might be seen Supply Caliber.

Seems that if there are hidden treasures of Sales and Supply Caliber, Quinstreet should acquire MediaAlpha. The company would be modestly profitable and have $550-$600M in annual Sales and be worth more than the sum of the two current values. It could result in QNST value well over $1.2B and still be undervalued.

PS: I hold no stock of either company. My company SureHits was acquired by Quinstreet in 2008 (pre-IPO) were I worked until 2010 (post-IPO). What a great ride with great friends!