Tech takeover targets: further consolidation of online companies likely

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Takeovers of David Jones and Goodman Fielder, and the recent second bid for Treasury Wine Estates, confirm an unfolding mergers and acquisitions boom in Australia. But as the market focuses on large deals, some of the more interesting action is among smaller stocks.

REA Group’s acquisition of a 17.2% stake of iProperty Group in late July, and Expedia’s takeover of Wotif.com Holdings suggest further consolidation of online companies is likely. Technology-related stocks could be a winner for those who bet on takeovers.

Annoyingly, your columnist excluded iProperty Group from his list of takeover targets in mid-July, committing the investment sin of not letting profits run. iProperty had rallied 32% to $3.30 since its inclusion in April, so I pounced on the quick gains and ran.

REA’s $106 million investment in iProperty and Carsales.com’s 19.9% stake in iCar Asia signal the big advertising internet stocks are looking more aggressively for growth through acquisitions. iCar is down from $1.65 to $1.49 since it was dropped from this portfolio in mid-July. It was initially included at $1.10, and provided stellar, fast gains.

I add three technology stocks to the list this month: OnTheHouse Holdings, Nearmap and the third listed company in the Catcha Group stable, iBuy Group. As micro-cap stocks, they clearly suit experienced speculators who are comfortable with higher risk.

All three have been out of favour this year, and look a useful bolt-on acquisition for a larger technology company seeking to increase its scale. They also have low or no debt, reasonably open share registers and are not widely covered by broking firms – useful takeover-target traits.

1. OnTheHouse Holdings

Market value: $48 million
52-week high: 86 cents
Current price: 58 cents

The residential property internet site has struggled since listing in June 2011 at $1 a share in a $55 million Initial Public Offering. Fierce competition between REA’s realestate.ecom.au and Fairfax Media’s Domain has made it hard going for smaller players, despite the property boom.

OnTheHouse looked to be almost on life support when its shares slumped to 33 cents, and it was among the worst-performing floats of 2011.

It provides online real-estate content, including access to a database of property values, and uses free property data to attract visitors. It also sells property leads from potential buyers and sellers to real-estate agents.

OnTheHouse believes the revenue model in online property advertising will move from paying for classified advertising to performance-based models based on pay-per-lead services – a bit like carsales.com, which provides data to car dealerships.

With REA on a forecast Price Earnings (PE) multiple of 29 times FY15 earnings, according to consensus broking forecasts, and Domain’s value arguably affected by challenges in Fairfax’s traditional media operations, OnTheHouse looks a reasonable acquisition for a bigger player. It attracts more than 5 million unique visits to its site each month, and provides more than 36 million free property reports each month – a large database that a larger rival could do plenty with.

Some recent advertising wins with the big banks suggest OnTheHouse’s model is finally getting more traction – after the market’s patience had worn thin. It looks undervalued.

2. Nearmap

Market value: $135 million
52-week high: 68 cents
Current price: 40 cents

The online aerial-mapping company captured attention last year after soaring from about 5 cents to a 52-week high of 68 cents in late 2013. Using its online PhotoMap technology, Nearmap provides geospatial maps for business and governments.

Popular with real-estate agents and local councils, its big selling point is maps being updated more frequently than other online services.

Nearmap has since fallen to 40 cents, despite making significant operational progress with launches of Nearmap insurance and other property intelligence tools. Early investors, including Wilson Asset Management, took some profits.

Nearmap had run too far, too fast. But its share-price pullback creates a potential entry point for an acquirer that appreciates the latent value in its technology and Nearmap’s potential in the giant US market. In May, Nearmap announced it had begun test flights of its aerial-camera system in the US as part of an early push into global markets.

My hunch is Nearmap would be worth a lot more in the hands of a large technology or property company that has greater scope to commercialise the technology and provide add-on services. It will be worth a lot more than it is today if it builds a foothold in the US.

Further share-price weakness is possible, given the strength of Nearmap’s 2013 rally. If the price-fall continues, some bigger players could hover over one of the market’s more promising micro-cap tech companies.

3. iBuy Group

Market value: $147 million
52-week high: 70 cents
Current price: 34 cents

The third ASX sharemarket float from the Catcha Group stable – iBuy Group – has had far less attention than its larger sister companies, iProperty and iCar. The Asia-focused e-commerce provider raised $37 million in a float on ASX in late December at 32 cents a share. After soaring to 66 cents in March, it has tumbled to 34 cents.

iBuy was caught up in the tech bull run earlier this year and dumped amid the global rout in internet and lifescience stocks.

Acorn Capital, a good judge of micro-cap stocks, lifted its stake in iBuy from 8% in May to 10.9% in early July, and iBuy’s directors bought more shares this year. Although it is far less developed than iProperty and iCar, keen judges will have watched the success of those companies and the willingness of dominant online advertising groups to invest in companies in the Catcha Group Stable.

If a significant investment is not forthcoming this year, iBuy still looks a more substantial business than the one that floated, having this year acquired LivingSocial, an Asia e-commerce business. iBuy’s position in Asia, and leverage to the coming boom in Asian middle-class consumers, make it an interesting investment or acquisition for a larger company.

Also, the Catcha Group has a good record of establishing start-up companies to be bought out by larger players. This week’s appointment of new CEO, Krzysztof Marszalek, should give iBuy further momentum.

Other stocks

Not much to report on the portfolio since the last instalment in mid-July. The stocks (Reckon, NIB Holdings, iiNet, Westoz Investment Company, Reva Medical Inc, Tiger Resources, NRW Holdings, OzForex Group and Ten Network Holdings) are down about 2% on average. The S&P/ASX 200 was down 1.82% so far in August, as this column was finalised. OzForex was the big disappointment, down 15% since its inclusion. REVA Media rose 13% after sharp falls earlier this year.

Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations or offer financial advice. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at August 13, 2014.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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