Is $350M too cheap for Rocket Fuel?
The California ad tech company said the board will evaluate the proposal, which comes amidst a major reorg.
by Jaewon Kang
Tech mogul Gurbaksh Chahal says he has offered to take ad tech company Rocket Fuel Inc. (FUEL) private after long contemplation, but company followers believe his $350 million bid is too low and that it could receive other, more attractive buyout proposals. And that could lead to a spate of similar deals, industry observers say.
Redwood City, Calif.-based Rocket Fuel said Friday that it has received an unsolicited, conditional proposal from Gravity4 Inc., Chahal's ad tech company, to acquire Rocket Fuel for $350 million in cash. Based on 42.1 million outstanding shares of Rocket Fuel, the offer would value the company to about $8.31 per share.
Rocket Fuel said the board will evaluate the proposal with the assistance of its financial and legal advisers.
Shares of Rocket Fuel jumped nearly 10% Friday to close at $8.32, giving the company a market capitalization of about $350.2 million. Its stock is down about 48% year-to-date.
"It's too low," said an industry source who asked for anonymity of Gravity4's offer, adding that a more logical price tag for Rocket Fuel would be $16 per share. Based on Rocket Fuel's outstanding shares, this would value the company at around $674 million.
This person went on to say that other offers could come in for Rocket Fuel, which is in the midst of significant reorganization.
Just last month, Rocket Fuel announced a series of efficiency initiatives that are expected to cut costs by about $30 million annually. In a 8-K filing in April, the company said the efficiency plan includes a reduction of 129 employees, or about 11% of its workforce.
It also launched a process to identify a new CEO at the end of March. Co-founder George John, who remains as chairman of the board, stepped down as chief executive and Monte Zweben was appointed interim CEO.
Still, Gravity4 chairman and CEO Chahal said in a phone interview Friday said his company's offer is "more than fair."
Chahal explained that Gravity4 had been thinking about making an offer for Rocket Fuel for about a month and formally made an offer after markets closed Thursday.
"We know each other very well," he said of Rocket Fuel. "I don't think there's anyone else that's very natural to the company."
Silicon Valley-based tech mogul Chahal is not a newcomer to the world of advertising technology. In 1998, he founded Internet advertising solutions provider Click Agents.com Inc., which ValueClick Inc. bought just two years later.
He then started online advertising company BlueLithium in 2004 and sold it to Yahoo! Inc. (YHOO) in 2007. Chahal formed RadiumOne Inc. in 2009 but was fired last April following controversy surrounding charges of domestic violence.
In July, Chahal launched his latest venture, Gravity4.
"As a company ourselves, we've done a great job. We've made nine acquisitions already," he said. "The company is on a fast track and could potentially be a public company in about 12 months to 18 months."
Chahal said acquiring Rocket Fuel would fuel growth and accelerate Gravity4's initial public offering plan.
While Rocket Fuel has done a great job, it is also "a prime example of a lot of companies that rushed to go public" and now faces issues that come with not being able to execute fully, he added.
"Our offer is firm, and the company should consider it aggressively," Chahal said, adding that conversations between the two companies have taken place already. "The value of the company as a whole, when combined, will be significant."
Still, Rocket Fuel has made a fair amount of progress and has potential for more upside, said Murali Sankar, vice president of equity research at Janney Capital Markets.
"Why give that up for cash they don't really need?" Sankar said, adding that Gravity4's offer is roughly where the stock is currently trading.
"If something would come in that's in excess of $15 [per share] the board would be a lot more interested in looking at it," he said. "I don't think they would settle. ... There's no reason to have a fire sale."
He also pointed that there area lot of questions around Gravity4, adding that people behind the bid "don't have the cleanest reputation."
Sankar also noted that Rocket Fuel may be a better fit for players in the Software-as-a-Service (SaaS) space such as Oracle Corp. (ORCL) that have a software license-oriented business.
"They've positioned the company as more of a SaaS company," he said of Rocket Fuel, pointing to its purchase of [x+1] Inc. last year that allowed the company to do exactly that.
"There's a lot more value [in Rocket Fuel] and more players out there that could work with Rocket Fuel to consolidate [the market]," Sankar added.
The first source said Rocket Fuel may be among many publicly traded ad tech companies to be taken private, explaining that Tremor Video Inc. (TRMR), YuMe Inc. (YUME), TubeMogul Inc. (TUBE) and Rubicon Project Inc. (RUBE) could all now receive the spotlight as potential targets.
A flurry of ad tech companies went public in recent years, but the market hasn't been so kind. For instance, shares of Tremor are down about 70% since its 2013 IPO while YuMe stock is down 44% since its IPO also in 2013.
While the market has not been kind to ad tech players that have gone public in recent years, the space at large has seen healthy M&A levels. AppNexus Inc. grabbed Yieldex for $100 million in cash and equity after months of discussion while eXelate Inc. went to Nielsen Holdings NV (NLSN) after attracting interest from multiple strategics.
Sources have previously told The Deal that Millennial Media Inc. (MM) could also emerge as a potential acquisition candidate.
Officials with Rocket Fuel declined to comment further Friday. Those with Oracle, Tremor, YuMe, TubeMogul and Rubicon Project could not be reached immediately.
