DoubleClick's Double Whammy


By Sarah Lacy When most people think of DoubleClick, they think online advertising. So it was no surprise that it was hot during the Internet bubble and no surprise that it went cold in the tech bust.

Now it's for sale, and most analysts expect it to be sold off in parts. On Nov. 1, New York-based DoubleClick (DCLK) caught investors off guard with a tersely written press release saying it has hired New York investment bank Lazard Freres & Co. to explore a host of options including an outright sale, spinning off parts of the company, or even taking it private.

Why the white flag? After all, DoubleClick's third-quarter profit of $15.4 million doubled last year's fall-quarter profit, while revenue grew 8.3%, to $81 million. DoubleClick, however, is a lot like an impressionist painting -- it looks good from far away yet it's a bit of a mess when examined up close. DoubleClick execs warned investors during an Oct. 28 conference call that fourth-quarter sales should be between $72 million to $77 million, short of Wall Street expectations of $79 million in total sales.

SEVERAL MISTAKES. The bottom line for investors: DoubleClick hasn't displayed the kind of growth seen elsewhere in the online ad world. Although profits have grown over the last two years, sales increases have been unimpressive. Analysts expect revenues to hit $290 million this year -- way off DoubleClick's $506 million peak in 2000. As a result, investors haven't been kind. DoubleClick's stock closed at $7.81 per share on Nov. 2, well off its 52-week high of $12.81.

DoubleClick's problems can be traced to a series of mistakes, ranging from pulling out of the media-buying business to the disappointing integration of a half-dozen acquisitions over the last three years. "The question was whether they could synthesize those into a delicious stew instead of a pile of good ingredients," says Eric Schmitt, senior analyst at Forrester Research in Cambridge, Mass. Suffice to say, investors are still waiting on the dinner bell to ring.

A look inside DoubleClick explains the problem. It has two primary businesses. First is Abacus, a company acquired for $1 billion in 1999 that runs a database where catalog retailers can share information about customers. The other is the online ad business, which pulls in about two-thirds of total sales.

UNINTEGRATED. Despite what analysts believe was a strong performance in the third quarter, Abacus has been a strategic disappointment. It trades data about what customers are purchasing with catalog companies. It's the reason you get bombarded with catalogs from other retailers when you buy a couch from alace like Pottery Barn.

DoubleClick bought Abacus with plans to combine data about traditional retail and online spending patterns to build a giant consumer purchasing database. But after a federal privacy uproar, those plans were abandoned, and the two businesses were never really integrated.

The other side of DoubleClick's house, the online ad business, isn't up to snuff because it has been in the market's least lucrative part. In 2001, DoubleClick stopped buying placements for advertisers on Web sites, because ads were slumping with the tech bust.

SIDELINED. Instead, it focused on its ad-serving business, which tracks the effectiveness of online ad campaigns by monitoring things like whether an ad is clicked on and what purchases result. DoubleClick execs planned to augment this with other software offerings, like tools to build ads that included interactive features like sounds.

It was an ill-timed change. Media buying has come roaring back, and players like ValueClick (VCLK) and 24/7 Real Media (TFSM) are benefiting, while DoubleClick sits on the sidelines, says Troy Mastin, senior analyst at William Blair & Co. in Chicago.

Like so many tech companies, DoubleClick is getting squeezed by low-cost competitors. The number of ads it manages increased nearly 50% year-over-year. But DoubleClick is being undercut by smaller outfits such as aQuantive (AQNT) and ValueClick. That has left DoubleClick's ad-management revenues about flat when compared to last year, despite the increased volume of ads served, according to a research report by Richard Fetyko of Merriman, Curhan & Ford Co., an investment bank in San Francisco.

DIVIDEND HOPES. Investors can only speculate on who might buy DoubleClick. Because of its split business, few analysts expect just one. Abacus is likely to be sold to Equifax, Acxiom (ACXM), or Alliance Data Systems (ADS). All three are in the business of collecting and disseminating consumer marketing data, just like Abacus.

Some investors hope DoubleClick will use its $388 million in cash for a one-time dividend. Could be. But the only thing they're certain of is that this tech-bust survivor's days as an independent company appear to be numbered. Lacy is a reporter for BusinessWeek Online in the Silicon Valley bureau


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