Another Odd and Frustrating Acquisition (CKCM, PRVD)

This is getting a little frustrating -- for the second time in less than a year, a small, promising, high-growth investment is being bought out by a large conglomerate at a bargain price ... and I own the small company, not the big one.

Last December it was Provide Commerce (PRVD) being bought by Liberty -- a little bit of an odd fit, an online flower vendor being bought by an operator of cable channels. John Malone picked up PRVD at prices well below their highs of the previous year, taking advantage of a rough summer that had depressed prices somewhat.

And today, Click Commerce (CKCM) is being acquired by Illinois Tool Works (ITW) -- again a bit of an odd fit, with the massive diversified manufacturing conglomerate picking up the small supply chain software company. It's true that both CKCM and ITW have been serial acquirers, but that's about all they have in common -- ITW is mostly known for selling welding supplies, refrigerators and ovens, and other hard, dirty businesses. They have some units that would work well with Click, such as some manufacturers of barcode readers and some packaging suppliers that could integrate well with a supply chain management software suite ... but it could also just be that it was cheaper to buy Click than to hire them to help with supply chain management for ITW's huge, diverse manufacturing and supply operations.

And just as with PRVD last year, I think the big guy is getting a bargain. CKCM has traded as high as $31 this year and as low as $13 or so a year ago, but has never been given a premium price to match its meteoric growth rate -- perhaps because no one trusts CEO Michael Ferro because of their trouble during the dot com meltdown, or because no one is sure that they'll be able to continue growing if they ever stop acquiring small software companies. Click has had its share of skeptics, but at both a forward and current PE of about 14, excellent profit margins that should be able to climb as the RFID business grows, and a tiny price/sales ratio of under 3, I think Click remains a bargain to this day.

And it looks like ITW will enjoy the bargain, and we small shareholders will be left out in the cold. It's nice to see the 25% bump for my portfolio today, but I've bought shares both above and below the buyout price so my overall profit if I tender all my shares will be just about 13% -- fine, but not as great as I would have hoped for from Click as a stand-alone concern over the coming few years. CKCM has been growing consistently and profitably for about three years, and I was hoping for more. For more about my thoughts on Click, you can see previous articles from when I bought shares at $19 in May, $25 in March, and $14 last October,

I don't see any other potential bidders lining up to throw their money at Michael Ferro, and the fact that he has apparently agreed to sell his 25% at this price means it might be tough to get any leverage on ITW or any other bidder, so I'll probably be stuck with this offer regardless of how I feel about it. I haven't seen the official deal paperwork yet, but it appears that any other bidder would just have to pay enough to make up for Click's $10 million penalty to ITW -- not all that much, actually, just over 3% of the deal amount, but there's still no reason to assume that there are other interested parties out there.

If nothing else changes over the next few days, I'm likely to hedge my bets by selling half of my position, and let the rest ride until it's taken out by the tender offer unless I see a better short term use for that money -- one benefit here is that it's an all cash deal and should have no regulatory implications, so the expected tender offer in two weeks and closure of the deal within a couple months is probably quite feasible. Absent a bidding war that hasn't yet shown its handsome face, this isn't going to drag on.

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Proflowers will Provide (PRVD)

Provide Commerce (PRVD)

Bought January 27, 2005 at $34, and May 3, 2005 at $17.92


Finally I write about one of the more volatile stocks I own, and one that is one of my favorite companies as a consumer.

To tell the truth, I bought PRVD as soon as I found out that Proflowers was publicly traded. I don't know whether it was the strangely generic umbrella name of the company, Provide Commerce, or just my ignorance, but the IPO passed me by. Nothing wrong with that, it's usually silly to invest in IPOs at the first blush anyway.

But I did buy in as soon as I found out -- literally, that same day. I found out that Provide Commerce was the parent company, read their important SEC filings and searched quickly for other info, found what I saw to be reasonable, and bought a small position.

Almost as soon as I bought it, Proflowers announced that Valentine's Day quarter earnings disappointed, and sales hadn't climbed as much as they hoped. The stock cratered over a several month period and I eventually thought the knife had fallen far enough and bought in again. I never stopped believing in the business plan, and I still think it's a winner.

Then Mother's Day came, Proflower's second biggest day of the year. They came out and announced great sales growth for that holiday. The price started to climb again.

And last week, their earnings release justified the more recent enthusiasm the stock market has had for this issue. After poormouthing the year's earnings earlier on and rejiggering guidance, the earnings came in quite nicely at 65 cents/share. Guidance is not spectacular, but at this point I'm not really confident in the ability of management to precisely predict their sales during the few key holiday periods where they make all of their profits. They haven't successfully predicted them to Wall Street's criteria before, and I expect that the lower end of their guidance is much too conservative.

This company has survived the bust, they survived years as a private company, they built up a very loyal customer base of more than four million customers, with reportedly well over 60% returning customers, and they have a truly differentiated product -- how many companies can say that these days?

Why do I love Proflowers as a customer (and, thanks to Peter Lynch, thereby feel inclined to love them as an investor)?

The product is better and fresher -- the flowers they sell come direct from the grower, which means they are at least several days fresher and have received less handling than the stuff that teenagers have bouncing around in the back of the florist delivery van. They also give very specific examples of the flowers avaialable on their website, and have a much wider variety of always-available flowers than your local florist.

The prices are better -- because they are cutting out the boutique florist middleman, Proflowers can provide better flowers at a better price than their competitors.

The service is excellent -- I have used Proflowers for years and been very happy with the professional customer service I received. In the one case when flowers I ordered were not delivered on time, I got an apology from the CEO via email, the flowers free, and credit for a future purchase. I came back.

This has passed the viral marketing test, too, at least in my family -- not only does Proflowers advertise heavily, as any web consumer or XM radio subscriber knows quite well -- but everyone who receives flowers in this method notes it and often uses the service themselves. This is not a generic florist arriving at your door with a greasy driver holding his mitt out for a tip, it's a branded box that stands out as different. You do have to put the water in the vase yourself, but you pay attention and see that these flowers are higher quality, the lilies are just beginning to open and you've never seen such spectacular birds of paradise before, and you think of that the next time you need to send flowers.

Unfortunately, then the person you sent flowers to eventually finds out that Proflowers is a lot cheaper than the local florist. Hopefully they don't hold that against you, because after two weeks they're still going to see that among all the flowers they received that day, the Proflowers ones are the only ones that still sit proudly on the table, the rest having long since wasted away and been dumped in the compost heap.

So that's why I'm a happy customer -- why am I a happy owner, and one who is keeping an eye out for a chance to buy more?

Growth and scalability

Provide is growing much more quickly than its competitors. There are some specialty niche providers who seem to be growing well, too, like Callyx and Corolla, but they price themselves into a very small market ... and Proflowers has in the past provided the branded service for some of its competitors, like Martha Stewart Flowers, so those aren't really competition. The big outfit that is trying to hold Provide off is 1-800-Flowers, which has some "direct from the grower" services, but they still mostly work through their member florists for delivery. No thanks.

Provide Commerce is also building up "fresh direct" service in two other areas: premium meats, and fruit/gift baskets. In this area I'm not as sanguine about their chances -- the competitors provide a service that isn't obviously lower quality than Provide can offer, as the standard florist product is, though Provide may be able to supply equivalent quality for a better price. They migth be able to match Omaha Steaks on price, but it will be tough to take on that brand and tough to say that one frozen steak is fresher than another -- they're both frozen. In gift baskets and the like, Harry and David have been doing this for eons and aren't likely all that worried about this new upstart.

But I don't much care. I like Provide Commerce even if their only successful venture is Proflowers. They are not investing very heavily in either Cherry Moon or Uptown Prime (the two other services), and the business is indeed very scalable, they can use the same basic infrastructure to supply flowers or steaks or peaches ... the only real investment on their part is the relationships they're building with growers and providers. If they're able to build the business, that's all gravy on top of the successful and fast-growing Proflowers franchise.

Market Share

Fresh flowers are hot,more affordable and more available in greater variety than ever before, which, depending on who you talk to, is driving up overall consumption. But more importantly, Proflowers is growing about twice as fast as its major competitor, 1-800-Flowers.com, which means they're taking market share. For a company that has been around this long and is still increasing its numbers of repeat purchasers pretty significantly (50%+ last year, 60%+ this year), that's great news for the future as well as the present.

Provide Commerce may provide some better points for purchasing additional shares, but in this range I would happily consider buying more. They have provided guidance whose low end is right around this past year's actual earnings, which turned a few folks off, but a lot of that is accounting for stock-related compensation, which is still quite high at this recently public company. I plan to keep an eye out for buying opportunities when management muffs their projections for a holiday by a couple of percentage points -- the market overreacts wildly to those short term blips and might put Provide on sale again. But long term, I'm a happy consumer and investor.

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