BULLISH ON ( MWW )

One Monster Of A Premium In Store?

March 8, 2012  |  about: MWW, includes: LNKD, RHI

As we wrote back on Monday, the official announcement of Monster Worldwide (MWW) hiring an advisor was a promising sign. The CEO had mentioned on the 1st that the stock was too cheap and that the company would seek a strategic deal to enhance shareholder value. Then on the 2nd, Oppenheimer questioned the true seriousness of a deal causing the stock to sell off. Not too surprising to see some doubters as Monster is always rumored as a buyout candidate. A rumor that so far has not come true.

This time though appears different. Monster has actually acknowledged the interest and followed through with the hiring of an advisor. Possibly suggesting that some of the rumors in the past came from executives unhappy with the stock price and contemplating a deal.

Record Premium

Late Wednesday, Bloomberg published a very detailed report on the valuation potential of Monster. Our post had suggested off hand that the company could potentially attract a deal closer to the $13-$15 range that it traded at back in July '11. This was a very rough estimate to more highlight where Monster has come from than any formal analysis. After all, investing can be more about using a hand grenade than precision analysis. Figuring out whether Monster will attract $8 or $10 or $12 or $14 is a lot more key than 10 pages of analysis that pinpoints the value at $13.54 or whatever arbitrary number. The stock is only worth what some firm will pay not what number crunchers calculate.

According to this report, even reaching a deal at $13 would require a record premium for the sector making a deal not likely until the stock price moves higher. Most shareholders of the acquiring firm frown at huge premiums.

Having bought Monster after the September slump, we've been well aware of the cheap valuation and potential of the stock once the employment picture turns. What was surprising in the Bloomberg report is that several analysts suggested that an 80% premium was highly likely. This was surprising considering the general disdain for the stock these days.

BeKnown Potential

Though struggling in the modern recruiting world of LinkedIn (LNKD), Monster still has a compelling brand along with new social media products such as BeKnown on Facebook. Not to mention an International presence in 50 countries that might give an acquirer a major incentive.

In the hands of a new management or combined with the muscle of another firm, BeKnown could become a powerhouse rivaling what LinkedIn (LNKD) has accomplished.

Potential Suitors

Though LinkedIn and private equity are suggested as suitors, neither company would necessarily benefit from the ability to cut costs at Monster. More likely suitors would be Manpower (MAN) or Robert Half (RHI), or any other international recruiting service looking for scale.

Both Manpower and Robert Half have the operations and market valuation to absorb such a deal. Quickly eliminating the high cost structure at Monster could put some quick cash in these companies' coffers. One analyst suggests that as much as $100M in costs could be wrung out of them. An incredible amount for a stock trading below $1B, but a huge incentive for a buyer.

Don't expect any quick announcement, but as the stock approaches $10 and some time passes an acquirer might feel empowered to step up with the deal more palatable to shareholders when the premium on a $14 offer appears as 40% as opposed to 80%.

Details from the Bloomberg report:

• Even after the hiring of bankers helped spur a 20 percent gain in its stock price, the $1 billion company is still cheaper relative to its earnings and book value than at least 96 percent of U.S. Internet software and services firms greater than $500 million, according to data compiled by Bloomberg.
• Buyers would be paying an 80 percent premium -- the highest ever among similar-sized deals in the human resources and e-commerce services industries -- to get a hold of the New York-based company's 23 percent international sales growth last year from operations in more than 50 countries.
• "We've created a tremendous amount of shareholder value," CEO Iannuzzi said at an investor conference in Boston on March 1. "But the price does not reflect that."
• Even after the stock's 20 percent gain since Iannuzzi announced he was exploring options, Monster is still trading at only 0.84 times book value, the second-cheapest of 33 U.S. Internet software and services firms with market values of more than $500 million, data compiled by Bloomberg show.
• A strategic buyer may pay $14 a share to $15 a share, said Matrix's Katz, valuing the company's equity at as much as $1.85 billion. At 80 percent more than Monster's closing price of $8.33 yesterday, it would top the 53 percent premium Randstad Holding NV offered for Vedior NV in 2007 as the most expensive for a human resources or e-commerce services takeover greater than $1 billion, according to data compiled by Bloomberg that dates back to 1996.
• Private equity firms could be enticed by Monster's free cash flow, said Bill Kavaler, a special situations analyst at Oscar Gruss & Son Inc. in New York. Cash from operations after deducting capital expenses will reach $108 million in 2013

By Stone Fox Capital

Disclosure: I am long MWW.

Disclaimer: Please consult your financial advisor before making any investment decisions.