The stock market's greeting of the New Age interactive communications companies makes clear what the word "frothy" means.
Five interactive companies have gone public in the past 15 months, and at least two more are waiting in the wings.
Despite the rise in the overall market, only one of these companies, CKS Group, is selling significantly above its offering price. The others are down as much as 41%.
While no one knows for sure how any one of them will fare, it's a safe bet that the inevitable shakeout will force some of the IPO companies to consolidate or evaporate.
|How the agencies stack up:|
|Think New Ideas||13.1||(2.0)||26.5|
|Notes: Dollars in Millions. Estimated 12-month trailing revenues and net income. Data based on market prices as of Feb. 27, 1997.|
|Sources: Securities & Exchange Commission filings; Bloomberg|
In December 1995, CKS Group became the first significant initial public offering of an adver-tising/communications agency in more than 20 years.
CKS raised $42.5 million, followed by a secondary offering valued at $61.2 million. Today, its stock is double the offering price and sells at seven times revenues and 78 times earnings.
CKS' market value is $447 million. True North Communications, a company many times larger, is valued at $473 million.
Other companies jumped on the IPO bandwagon, pushing their connection with the Internet to obtain the maximum valuation. In reality, many of these agencies were doing less--often far less--true interactive business than their hype would have you believe.
Eagle River Interactive, for example, derived 75% of its 1995 revenues from selling outdoor advertising in ski areas. Yet its IPO in March 1996 valued the company at $170 million, 22 times prior year's revenues.
17 TIMES REVENUE
Leap Group was a two-year-old advertising boutique that also did Web sites. At Leap's IPO last September, it was valued at $136 million, a stratospheric 17 times revenues.
And the parade didn't stop. Think New Ideas was formed from six totally different businesses combined for the purpose of going public last year.
Two IPO hopefuls, meanwhile, are waiting in the wings.
TN Technologies includes Modem Media and is the largest purely interactive company of them all. Poppe Tyson, owned by BJK&E, canceled its first attempt to go public, but is testing the waters again, eager to get on the boards.
Behind the extraordinary valuations for these new companies' stock is a business model vastly different from that of traditional communications companies.
This model is typically based on project work, not an ongoing stream of revenues from creating and placing advertising.
The good news is that client conflicts are far less of a problem. The bad news is that clients see the interactive agency as a vendor, and can experiment with several shops that bid for the job.
Growth rates of 50% or more are inherent in the business plan for interactive shops, based on the exponential increase in Internet business. The traditional ad business grows only about 5% to 6% annually.
Investments in technology make the new-wave agencies potentially more productive (and eventually more profitable) than most advertising agencies.
Their public stock gives them currency to grow by acquiring other companies, sometimes as large as or larger than they are. Last fall, Eagle River tripled its size by buying a computerized training company.
Jim Dougherty, who follows the new-media business for Dean Witter, commented more than a year ago that "the faith of the Internet pilgrims will be shaken from time to time, and the stocks will suffer temporary, if sharp, declines."
We've certainly seen sharp declines already. Time will tell just how temporary they are.
Abbott C. Jones is a managing director with AdMedia Partners, a New York investment bank.
Copyright March 1997, Crain Communications Inc.