Harbert Discovery Fund Reduced Its Stake in Marchex (MCHX)
Key Summary: Edenbrook Capital steadily increased its stake in Marchex from 2017 to 2020, reaching 19.22%, advocating for strategic transitions, cost optimizations, and highlighting undervaluation. Harbert Discovery Fund, holding 5.8% at its peak, emphasized the analytics business's undervaluation and potential for exponential value but reduced its stake to 5.4% by October 2020.Both funds supported initiatives like share repurchases and strategic reviews, with Edenbrook collaborating on a tender offer for Class B shares.
Market Cap: $86 million | Marchex, Inc. is an advertising analytics company that offers products and services for enterprises that rely on consumer phone calls to drive sales.
- On February 9, 2017, Edenbrook Capital (8.04%) expressed concerns regarding the company’s performance and financial status. It stated its belief that with the right cost structure, the company could achieve 10% operating margins. Based on the current revenue base, at just 8x operating profit, this would yield a value more than double the then-current market price. Edenbrook added that the company could be an attractive target for strategic acquirers or, given its strong balance sheet and commitment to improving free cash flow, to financial buyers. To read more, click here.
- On March 29, 2018, Edenbrook Capital increased its stake to 11.7%.
- On August 29, 2018, Harbert Discovery Fund disclosed a 5.2% stake and stated that it had engaged in, and anticipated further, discussions with management and the Board regarding ways to enhance shareholder value. Source
- On October 2, 2018, Edenbrook Capital increased its stake to 13.1%.
- On November 7, 2018, Edenbrook Capital increased its stake to 14.3%.
- On December 26, 2018, Edenbrook Capital (14.5%) sent a letter ("Exhibit C") to the Chairman expressing support for the company’s transition from a primarily transactional business to a recurring revenue business. The letter praised initiatives executed in 2018, such as special dividends, share repurchases, and strategic transactions. It also reiterated Edenbrook’s belief that the Class B Common Stock was undervalued in the marketplace and traded at a significant discount to the intrinsic value of the company.
Valuation Insight:"
We believe Marchex’s trading price of $2.63 per share (as of December 21, 2018) reflects a substantial discount to comparable industry valuations. Similar analytics-based public companies trade at 4-6x revenue, while private companies are financed at 6-10+ times revenue. Valuing Marchex at 3x analytics revenue and including $44 million in cash would yield approximately $4.65 per share, 75% above the current price of $2.63. Adding discounted values for the legacy business and the NOL carryforward increases this to $6.25 per share, more than double the current price."
- On August 29, 2018, Harbert Discovery Fund reduced its stake to 4.1%.
- On August 13, 2019, Edenbrook Capital increased its stake to 14.75%.
- On September 25, 2019, Edenbrook Capital (15.08%) stated:"Following the Issuer’s second-quarter earnings report, conference call, and meetings with management, Edenbrook believes that the estimates of value included in its December 26, 2018 amended 13D filing, and related letter, are more conservative than previously believed." SourceOn December 20, 2019, Edenbrook Capital increased its stake to 16.09%.
- On February 14, 2020, Edenbrook Capital increased its stake to 17.60%.
- On February 19, 2020, Edenbrook Capital increased its stake to 19.22%.
- On March 12, 2020, Harbert Discovery Fund (5.8%) stated that the analytics business was undervalued and had the potential to deliver exponential value creation for shareholders. It noted that similar software businesses focused on speech, text, and call analytics were commonly valued at 3-5x sales. A 3x multiple on the company’s call analytics business alone would represent +180% of the company’s market capitalization, excluding the value of its voice data library and call marketplaces business.
"With accelerating growth, we see a path to the Issuer’s stock trading at over $5.75 per share (+186% upside), assuming 10% analytics sales growth in FY20, a 4x sales multiple, and a stable cash balance."
Harbert also stated that absent significant growth in the analytics business in 2020, it anticipated the company might explore a broad range of strategic options to maximize the value of its business units, balance sheet, intellectual property, and data library. Source
- On August 10, 2020, the company announced its intent to launch a joint and equal tender offer with Edenbrook Capital to purchase up to 10 million shares of Marchex’s Class B common stock. Edenbrook Capital had discussions and intended to continue collaborating with the company regarding the tender offer. Source
- On October 19, 2020, Harbert Discovery Fund reduced its stake to 5.4%.
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