Chainsaw Screen Massacre Is This CEO's Best Bet to Save Company

  • Perion spent equivalent of its market cap on ad tech company
  • Undertone's ad sales will contribute 55% of 2016 revenue

You’re scrolling through news on your smartphone and suddenly an animated chainsaw slices the screen image in two, revealing a red Ford F-150 serenaded by hard-charging guitar rock.

In the world of online publishing, this is what’s called “high-impact advertising,” and Josef Mandelbaum, chief executive officer of Perion Networks Ltd., is betting it can save his company. 

Mandelbaum said last week he would pay $180 million in cash to buy Undertone, the maker of the chainsaw ad. Perion, whose core business enables developers to make money from free software by packaging it with search engines, climbed 23 percent in the stock market last week, trimming its loss this year to 36 percent.

Perion shares have been in steep decline since the summer of 2014, after its business model received a death blow from Google Inc.’s crackdown on software downloads that expose users to unwanted ads. Some of the investors who abandoned the stock have come back because of the Undertone acquisition, which will contribute more than half of Perion’s revenue next year, said Daniel Kurnos, an analyst at Benchmark Co.

The deal is “a potential turning point for the company,” Kurnos said.

Price Tag

The acquisition was no small bet for Mandelbaum. The $180 million price tag was more than Perion’s market capitalization on Nov. 30, the day before he announced the deal. He said Perion also received a $10 million equity infusion from JPMorgan Asset Management, which was already a shareholder in the company through its stake in Conduit Ltd., whose unit merged with Perion in 2013.

Mandelbaum was willing to bet the house on Undertone, first, because ad tech companies come cheap these days. Considering Undertone will generate $144 million in revenue next year, the price was “reasonable,” according to Kurnos. Also, Perion has been trying to make the move from promoting desktop software to being a one-stop sales and analytics shop for mobile advertisers. Undertone, which went through its own transition from banner ads to expensive, “high-impact” digital ads, has strong relationships with brands and ad agencies, something Perion was missing, Mandelbaum said.

“I’ve looked at maybe 100 companies over the past year, and this is one of the few that had scale, profitability, and a differentiated marketing position which was consistent with where we wanted to go,” Mandelbaum said in a Dec. 2 interview.

Screen grab of Undertone "high-impact" ad for Transformers DVD release


Revenue will grow 60 percent next year with the addition of Undertone, Mandelbaum told investors on a Dec. 1 call. Sales will reach $267 million in 2016, according to the average estimate of three analysts surveyed by Bloomberg.

Perion, closed last week at $2.80 per share, compared with a peak of $14.70 in May 2013.

The Tel Aviv-based company now trades at 7.4 times 12-month future earnings, less than half the valuation of larger rival IAC Interactive Corp, which also has an affiliate search business.

High Impact

High-impact ads aren’t new. They’re the digital equivalent of a pop-up perfume ad in a print magazine, said Susan Bidel, an analyst with Forrester Research Inc. in New York. Perion and Undertone have plenty of competition. Many publishers design high-impact ads in-house, and large companies like AOL Inc., have had design studios that produce these types of ads for years, Bidel said.

It’s an attractive business because the ads are “magnitudes more expensive” than a banner or display ad, and the general thinking is that the ads are more appealing to consumers than now-infamous pop-up ads, or staid banner ads that readers can easily ignore, she said.

“The purists are going to say that this is equally irritating because it’s blocking their ability to get to the content,” Bidel said. “Other people would say it’s far more acceptable because it’s entertaining and a much higher quality ad. It’s not a jiggling belly fat ad.”

While investors and analysts have cheered the deal, some still aren’t sold on Perion stock. Kerry Rice, an analyst with Needham & Co., kept a hold rating on Perion, despite calling the acquisition “transformative,” because the company will be trying to carve out a niche among giants like Facebook Inc., Google Inc. and AOL.

“While we believe Perion is much better positioned and has more control of its own future, we remain cautious on the competitive dynamics of the digital advertising industry,” Rice wrote in a Dec. 2 note.

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