Valuing Conglomerates, Online Companies and Social Media: A Modest Assessment of United Online
United Online – Ugly Duckling?
Conglomerates form. Conglomerates break up. Conglomerates confound. And yetÂ they continue to be part of our investing landscape and compel us with theirÂ stories and promise.
Promise of what? Diversification, growth or â€œsynergyâ€ – which variablyÂ includes scales of economy and redundancy elimination, diversification, andÂ growth through new products or businesses. No matter the reason, each shouldÂ lead to higher or more stable earnings, or a more marketable company.
These investments, be they through internal growth, purchase or merger shouldÂ be in stable or growing industries, or with the dream of an evolution into stableÂ or growing industries.
ADP has been very successful in careful, complementary AND synergistic acquisitions.Â Berkshire Hathaway and GE have also been successful in spite of their largess.Â Many others are quite disappointing including the former AOL Time Warner, InteractiveÂ Corp (IACI) and the multitude and ever changing and incomprehensible LibertyÂ Media blobs (For a laugh, read the Liberty Media Wiki entry and try to figure out who owns what â€“ and it hasÂ six tickers to boot!). Extensive B-School analysis has been done on the urgeÂ to merge / conglomerize / diversify; conclusions are inconclusive on the benefits.
As ideas, conglomerates, no matter how they are formed, have been defendedÂ on a number of grounds, but reality shows they seldom work as well nor for asÂ long, if at all, as imagined. In fact, conglomerates risk falling behind theirÂ focused competitors.
With that as preface, I have been staring at the United Online conglomerate for a few months now and canâ€™t decide how I feel about it. Over its tenÂ years of life, it has achieved a high of around $110 and a low of around $1.25,Â so I am sure it has disappointed more than a few shareholders. Given its currentÂ price around $6.30, it is certainly a long way from its top.
What is United Online? It consists of:
MySite â€“ A plain vanilla web host
Classmates â€“ Online school social networking
NamesDatabase â€“ A generic social networking database
FTD (Florists’ Transworld Delivery) â€“ United States National referralÂ florist
Interflora â€“ UK National referral florist
StayFriends â€“ German, Austrian, Swedish, and Swiss social networking site
Netzero â€“ Internet access service
Juno â€“ Internet access service
MemoryLane â€“ Nostalgia content provider
MyPoints â€“ Loyalty marketing program web site
Trombi â€“ French social networking company (#8 as of December according
Online conglomerates like United Online provide a good case on some of theÂ specifics of why conglomerates, and online conglomerates in particular, oftenÂ donâ€™t work:
- Fake synergies â€“ Instead of focusing on the greater market in the real world, conglomerates often focus on the inter-relationships of theirÂ own entities e.g. running ads for your services on your other services toÂ demonstrate that both entities are profitable and/or effective
- Fake diversity â€“ Bets on industries that look different but might not be e.g. three of United Onlineâ€™s primary properties have socialÂ media associations
- Late to game â€“ Often, companies merge or buy properties near the top of a market, as did United Online when it merged NetZero and Juno
- Poor innovation quality / Non-Existent innovation â€“ Companies withÂ large, disparate assortments to keep track of often do not do a good job creating,Â evolving or expanding products. For years I thought the long suffering oldÂ line Internet service providers would innovate to compensate for the lossÂ of business to cable companies. Perhaps a mobile solution? Multi-access solutionsÂ for road warriors allowing access in hotels and highway rest stops? LargeÂ scale powerline broadband internet alternative? Nay, no branded, nationalÂ innovative broadband offerings, while smartphones, Clearwire, iPads and theÂ phone companies take up that mantle. Apparently, this is a common problem,Â and not just among multi-faceted companies since the cable companies haveÂ squandered their lead to mobile broadband with their hard won broadband internetÂ lead.
- Lack of focus â€“ How many conglomerate units are not top competitorsÂ in their markets or worse, competitors in shrinking markets. Again, it generallyÂ takes obsessive, single minded focus to achieve the top in a business.
- Management limits â€“ Many, if not most of the problems above can beÂ attributed to management inability. Single companies require management toÂ understand and control extent (geographic, business type and style), industryÂ variety, market nature and every other complexity that accompanies a singleÂ company in a single market. These problems are compounded in conglomerates.
How is United Online handling its conglomerate status? Is this a durable empireÂ or a house of cards?
|Â||Communi-cations Revenue||% change||FTD||% change||Content & Media (incl. Classmates
& Memory Lane)
|% change||Interseg-ment elimi-nations||% change||Total Revenue||% change|
As alluded to earlier, the dial-up access segment is declining quarterly, notÂ surprisingly, with a sharp drop last quarter which may or may not signify anything.
FTD is lumpy because of seasonality, but only up by about 1% a quarter overÂ the past eight.
Content & Media; which includes Classmates, Memory Lane, and MyPoints units;Â has been lumpy but has dropped almost 20% (17.4%) over eight quarters.
Total company revenues, accounting for intersegment eliminations, have droppedÂ 8.4% over eight quarters.
The writing on the wall tells me that dial-up will be gone in a few years,Â leaving Flowers and Content & Media. We can probably winnow that down aÂ little further.
Once upon a time, there were GreenStamps. And they were good. Then came theÂ Entertainment Book. And it was better.
Then the business world realized how much mass scale loyalty (read: laziness,Â inertia, convenience) was worth. Thus were spawned credit card points programsÂ and airline points programs. While my order of events and inventions may beÂ off, you get the point(s).
Then online loyalty marketing came along, and it was even better. And competitionÂ appeared. Competition in the loyalty marketing program segment has been significantÂ for a while now, with Ebates, Upromise and FatWallet in the fray alongside MyPoints.
Fast forward to today. Not that many of you receive a physical newspaper, butÂ I do and around eight months ago, the cover of mine began to be labeled prominentlyÂ with â€œ$12 for $25â€ dollar deals daily. Even if you donâ€™t getÂ a physical newspaper, you may be graced with these because of your online registrationsÂ for dozens of sites. I certainly have.
Add to this the variants spawned and evolved from the Daily Candy variety of daily deal, which now includes Woot (now by Amazon), Myhabit (by Amazon), Gilt,Â RueLaLa, Ideeli, HauteLook, and BeyondTheRack.
There is more. Although I am not a morning television variety news watcher,
my sister is and she called me early the other day to have me grab one of theÂ excellent deals offered to their viewers â€“ 50 percent off of a brand nameÂ Bluetooth speakerphone. Their web site was so swamped that I attempted to logÂ in and purchase the headset ten times over seven hours trying to buy the darnÂ thing. Unbeknownst to me, I had purchased it on an early attempt and all subsequentÂ failures were because of the one per customer limit. I called my ten year youngerÂ self the other day and laughed at him for thinking he knew what consumerismÂ was.
Add to these the coming tsunami of competition from Groupon (estimated marketÂ cap of $20-$30 billion!!), livingsocial (estimated market cap of $3 billion), Google Deals and the plethora of wannabes will certainly mean erosion in theÂ usage of the MyPoints program as currently constructed.
Finally, Amex and Foursquare are introducing a geolocal mobile discounts andÂ payments partnership. When your current location is offering a deal, you canÂ have your phone tell you, and even buy it using the phone.
Defining where loyalty marketing ends and daily deals begins is not the pointÂ of this detour so much as to point out that the entire field of daily deal / couponing / discounting is morphing and leaving everyone scrambling, including,Â I suspect, MyPoints.
Thus, the remaining elements of the company are a florist and online nostalgiaÂ services. The competitive pressures on these are not insubstantial, either.
At one time, it looked like Classmates had a chance to be the high school socialÂ network but, as with another dozen perfectly good companies, Facebook ate theirÂ breakfast, lunch and dinner. As a paid subscription service that has been portrayedÂ as competing with the free social media juggernaut, it has at least a perceptionalÂ challenge. Many have already written off United Online, if a recent NetworkÂ World article on social networking is any indication.
Finally, the May 2011 issue of Consumer Reports reviewed national florists (Proflowers, 1-800-Flowers and FTD) and rated FTD slightly lower in terms ofÂ quality and reproduction of web site bouquet imagery. This kind of trusted sourceÂ publicity may mean a hit to growth, or even a decline this quarter.
But isn’t United Online profitable, you protest, with a Price Earnings ratio of around 10, and a six and a half percent dividend (!!!) to boot? The two important points on those.
Whereas dial-up has experienced a slow, steady, almost predictable decline, Classmates could face a near instant death if Facebook introduced a reunion class memories application. I suspect this fate lies closer for some companies; the proliferation of the Facebook Social PluginÂ (see bottom of page) leads me to believe that Disqus, at least as we know it, is not long for this earth. This is one probable reason why United Online is not being valued more highly.
A dividend is great, until you aren’t getting it anymore. United Online, like dozens of other companies, wisely cut its dividend during the great recession. Dividends are violabile and you should be assessing them based not just on their size, but also how safe they are going forward. Potential instant death does not say safe to me. Furthermore, if we are to be pricing this company as a social networking company, how many social networking companies do you expect to see issue a dividend in the next five years?
Serious concerns exist about United Onlineâ€™s Future. Their Memory Lane product, a product with a short history, is largely replacing the steady earnings of their fading dial-up business. Time will tell whether Memory Lane will become just another online memory.
United Online â€“ Beautiful Swan
On June 2, 2011, Barronâ€™s featured United Online in its Weekday Trader column. After making a few of the headwind arguments I made above, it made an argument that United Online has more promise than the market is giving it credit.Â After all, it has a dividend!
Then an analysts valuation of United Online was divulged – $8.50 a share, just about exactly 50% higher from what was then its current price of $5.65. Its current market capitalization is approximately $500 million .
Finally, how this valuation would be realized was laid out, which in a nutshell was the result of a transition from dial up to Classmates /Memory Lane revenues.
I am usually a fan of Barronâ€™s, but the piece left me wanting.Â Granted, it was meant to be a quick hit and not an in depth look, but I had been banging this company around in my head for a while beforehand and had much more expansive scenarios to share, a condition to which I am prone. My scenarios contained many more ideas, both short and long.
Three arguments have convinced me that United Online is a much better long bet than short bet:
- The August 3, 2011 conference call (and quick reviews of previous conference calls)
- Dividend safety
- Potential for value realization of United Onlineâ€™s place in the business ecosystem
August 3, 2011 Conference Call
A few important points, both direct and indirect.
What was abundantly clear in the call was that flower selling is the foundation of theÂ future of United Online, and that is OK with the company and should be for investors.Â Its revenue is five times the level of the next largest unit at the company, will be responsible for the bulk of the earnings and where most future dividend payments come from.
United Online clearly recognizes this.Â Its recently obtained a credit facility, as was explained on the call, was clearly for the FTD unit, not wild goose chases.Â Its business is both a U.K.business (Interflora) and a U.S.business (FTD), allowing them to weather single currency fluctuations. Flowers is a competitive but stable business.
I recently tried the service and the flowers were attractive, as advertised, and while competitively priced with other online flower sellers, still added $50 to my most recent credit card bill.Â High purchase prices mean thicker revenue streams.Â They have been discussing adding related gift offerings to its mix.
On Facebook, they made it clear on the call that it is a partner and United Online benefits immensely from being able to advertise and make connections on the Facebook platform.
MyPoints is holding its own and not declining as I had been worried about given the onslaught of potential competition.
The company did spend time discussing how it would continue improve integration of Memory Lane and Classmates, and spread the word about its offering through online and offline advertising.
On this call and previous ones (given a quick review), the calls are professional, down to business, and do not spend time waxing poetic about soaring ideas, exciting new business models, and the potential of this that and the other thing.Â President Goldston and his crew discuss financials and how their little cash generating machine is being carefully tended.
What I didnâ€™t hear, probably because it was tentative, was of a settlement of the class action suit related to how Classmates.com unfairly lulled people into signing up for Gold Classmates memberships. If this linkÂ is be believed, the settlement seems more amenable to the aggrieved than a previous settlement proposal, may result in lower total payouts, and ends a distracting chapter in United Onlineâ€™s history.
United Onlineâ€™s most recent financials release contained no red flags indicating there might be a problem with their dividend.Â No cliff yet for the dial-up business and from the conference call, it sounded like churn might actually be down due to the aging of the dial-up customer population.
United Onlineâ€™s Place in the Online Ecosystem
Ecosystems are complicated places, where relationships between organisms run the gamut from nonexistent, to indirect, to symbiotic, to parasitic, to predator and prey. Â These interactions are further complicated by changing environments and resource levels.
United Online might have not been the winner in the Facebook challenge, but it is uniquely situated to take advantage of its position in the marketplace.
If United Online is examined properly, it can lay claim to a piece each of three currently richly valued business models, as well as that of an interesting kicker model:
- Content Permissions, Aggregation and Delivery
- Social Media Ecosystem
- (Successful) Paid Subscription
- Reunion Services
Content Permissions, Aggregation and Delivery
Perhaps youâ€™ve heard of Netflix?Â Worth $13 billion. The content aggregator and distributor has so far resisted significant competition, either from copycats like Hulu (widely accepted valuation estimate is still $2 billion as it was in 2010), cable providers such as Time Warner or content owners like Liberty Media with properties like Starz.Â Even YouTube (Purchased for $1.65 billion in 2006) / Google TV, while running a successful advertising supported distribution model, is struggling to make successful a paid distribution model.
Similar to these other entities, United Online is becoming a content aggregator and distributor of content â€“ nostalgic content, much of that content in areas NOT already spoken for on a broad basis.Â This includes yearbooks, commercials, even magazines.Â No other company offers this interesting, useful and value added body of content. With their head start, while their current offering is small, they have the potential to become the go-to non-traditional content offering.
Social Media Ecosystem
A moment in May 2012 or earlier will remind us once again the value and ruthlessness of the network effect.Â Of course, that is the most recent widely accepted date for Facebookâ€™s IPO. At an estimated $100 billion, this lofty valuation points to the spectacular power social networking has in drawing eyeballs.Â It is expected that social search will change the way we search, and possibly the way we consume whatever we find when we search.Â Myspace (purchased by News Corp. for $580 million in 2005, sold for $35 million in June of 2011), Friendster (sold December 2009 for $30 million) and United Online to a greater or lesser extent failed against the network effect juggernaut, and all suffered some consequences.Â And the pain and suffering continues, as this techcrunch article suggests regarding MySpaceâ€™s accelerating decline in traffic.
But not everything gets eaten in ecosystems.Â Ecosystems are dynamic, and for every expanding species, not only are there shrinking species but there are adapting species. Social media is so promising and Facebook SO huge and powerful that the there is plenty of money to be eaten in the growing ecosystem forming around just the leader in this new ecosystem.Â Oodle, Zynga, Wildfire, Slide, and Rockmelt are some of the better known beneficiaries.Â United Online could have an important place in this ecosystem as the repository, aggregator and distributor of our shared school and generational histories.Â Over time I see many more companies integrating their offerings seamlessly into the Facebook interface (ed. – duh). In the bricks and mortar world, retailers lease space out to retailers within their stores such as Home Depot does with its garden centers.Â Once integrated, we can all howl uproariously at our yearbook pictures easily accessible from our Facebook tablets with a seamlessly integrated Memory Lane by United Online.
And if United Online adds additional true social features e.g. chat, walls, email, etc., stickiness and value of the offering increases, sweetening the pot.
Sticky, successful paid subscriptions were hard to come by until recently.Â Except for the Wall Street Journal Online (Part of Dow Jones, purchased for $5 billion in 2007) and later Ancestry.com (Current cap of $1.65 billion), there were almost no successful paywalls of any scale in spite of high profile efforts over the past decade.Â Ubiquitous mobile hardware, social media and standardizing content licensing are allowing paywalls to succeed where they did not in the past.Â The newest New York Times second effort seems to be working, and Dow Jones is walling off additional content as it builds on its existing model.Â Memory Lane / Classmates is creating a repository of content, and is custom editing some of it to identify the most memorable parts of the content they license, adding value. Unless a company has the scale of Google, it cannot make desirable content available for free on advertising support.Â So far, United Online seems to be making a successful transition from its old revenue streams to a hybrid advertising and paid model for its nostalgia business.
Reunion Business Services
United Online is not in this business, at least not officially.Â And this isnâ€™t a hot business model like social networking.Â But letâ€™s look at the reunion business for a moment.Â It is highly fragmented.Â Thousands of companies organizing tens of thousands of reunions. Every reunion startup has to learn the same lessons afresh, establish the same relationships with reunion spaces and caterers, buy paper in relatively small quantities, etc, etc.Â Each organizer has to reinvent the wheel each time it sets up a reunion.Â Why not offer online reunion management and registration software, while showing ads on the pages!Â I believe I have seen some of the new medical electronic records management (ERM) systems with the same model.Â A reunion supplier network organized by United Online can offer organizers bulk discounts on supplies.Â United Onlineâ€™s nostalgic content and yearbook catalog can be used to ease the creation of reunion invitations and materials, a reunion database, and enhance the reunion experience.Â United Online has all the pieces in place to make this a reality.Â What finally crystallized this was hearing about competing reunions being organized on three different online platforms. A business ripe for development.
After spending an excessive amount of time bashing conglomerates in section one of this piece, how can I now laud diversity in the next?!?!
After reexamining the evidence, I have rebutted the objections posed above as follows:
- Real Synergies, not Fake Synergies: Synergy can be real, too.Â Sellers of flowers should naturally offer gifts as an extension of their business.Â And before your reunion, you really might want to consider buying flowers for that crush from high school. There are real offenders of this in the market but United OnlineÂ doesn’tÂ seem to be one of them.
- Related Business, not Fake Diversity: One companyâ€™s fake diversity if another companyâ€™s related business.Â If a related business can use the same infrastructure e.g. social networking source code i.e. Trombi and StayFriends, then maybe it is the same business.
- Cash Cow, Even if Late to Game: During the rise of cell phones, smart phones, laptops with broadband cards, I will never forget Whitney Tilson suggesting buying pager operators.Â The craziness!Â I donâ€™t think I understood until now why that was a great idea.Â Cash generating businesses continue to generate that cash for a very long time after their technology is â€œobsoleteâ€.Â United Online still earns plenty of free cash from its dial-up unit even though dial-up is on the decline. Â Seeing the writing on the wall years ago, United Online wisely invested that cash wisely in new businesses e.g. it spent only $56 million dollars in 2006 on Classmates.Â An excellent purchase, it turns out.
- Goose Chases or Innovation: We have unrealistic expectations of our leaders sometimes.Â Most acknowledge that Brian L. Roberts of Comcast has done an excellent job, even if heÂ hasn’tÂ yet come up with the solution to the competition offered by the speed and mobility offered by mobile phone operators. Â We remember the successes of innovation leaps of faith, not the 100 times as many failures.Â Companies are often terrible at allocating capital and United Online has done pretty well balancing investment with restraint.
- Mini-Conglomerate, Not Lack of Focus: United Online has but a fraction of the businesses that Interactive Corp, and United Online’s diversity has served it well where its flower business has gracefully replaced the declining revenue of its dial-up business.
- Management Self Control and Competence, Not Management Limits: Given my deeper assessment of United Online, it simplyÂ doesn’tÂ appear that the company has management constraints.
Game of Valuations
Market capitalizations, and purchase and sale prices have been sprinkled throughout to prepare us to play a game; â€œHow Much is United Online Worthâ€. Now, before you answer, consider carefully, are we in another tech bubble? And how much would this affect the value of these companies? Once you have those answers, letâ€™s ask, and answer, questions such as â€œWhich is more right, United Online at $500 million or Facebook at $100 billion, 200 times larger?â€ Or if you please, â€œWhich is more wrong?â€ Granted, Facebook is growing very rapidly, already booking over $2 BILLION worth of revenue, the primary source of which is advertising.Â This is eight times United Onlineâ€™s $250 million or so of revenue.
But wait, there’s more. We should gather a few more breadcrumbs.Â LinkedIn just IPOâ€™ed, for a market cap of $6 billion dollars. Its revenue last year, however, was approximately $240 million, around the same as for United Online. Twitter is estimated at a $5 billion valuation, with $50 million in revenue last year (2010), possibly $150 million in revenue this year (2011) and $250 million in revenue next year (2012).
United Onlineâ€™s move to Memory Lane is a wise lateral move that is the foundation of a solid offering that complements the future build out of social media. If the markets are valuing Linked in at $6 billion and Facebook at $100 billion, then United Online should certainly be receiving more reflected glory than it currently is. Obviously traditional valuations based on revenue, earnings, cash flow and returns aren’t working purely fundamentally here. Perhaps a valuation based on active members?Â If Facebook has 600 million active members and Classmates has 10 million, then with 1.67% members, might it have half the value per user as that of Facebook? This calculation would value United Online at $835 million or approximately $9.40 a share.
So, whether it is $8.50 as Barrons suggests, $9.40 or a simple double ($10.00), I urge you to (re)consider this company is a new light.
 Unless otherwise noted, market capitalizations from recent media coverage January through July 2011 and are for broad comparisons only.Â In this market, daily valuations are a crap shoot.
 Â While I felt the need to mention MyLife (the old Reunion.com), I had no idea what to say about it.Â How to value this strange beast with its massive marketing spending including hundreds of TV spots?Â According to Wikipedia, 90% of revenue from subscriptions â€“ people really pay just as they do for Classmates. Does MyLife really offer unique content or a unique service?Â It is supposed to have $60-80 million revenue this year, with perhaps 50 or 60 million members, although how many actives is an open question. How much of that revenue is eaten by television advertising? According to some sources, it claims to be adding social interaction tools to its site.
Originally published July 8, 2011. Minor edits July 15, 2011, July 28, 2011. Major edits August 9, 2011. Expect continued refinements.