Contact: Scott Denne
A startup with less than a year of operations has made a $350m cash offer to buy Rocket Fuel. While Rocket Fuel’s board has an obligation to take this offer seriously, we’re under no such obligation. This bid is ridiculous. Aside from the fact that it barely offers a premium to Rocket Fuel’s recently depressed stock price, Gravity4 doesn’t look well positioned to make such a purchase.
Rocket Fuel has struggled as a public company. Its stock is down almost 70% in the past year as the company hasn’t maintained its earlier growth rates. It is, however, still a business that generates more than $400m in annual revenue. Even with a deceleration of its growth rate, Rocket Fuel still put up 40% year-over-year growth when it posted its first-quarter totals on Thursday.
Gravity4, by comparison, has been operating for less than a year and there is no reason to think it has the kind of cash that it’s offering to pay. Even if it’s working with a financial sponsor, that begs the question, why would a sponsor need Gravity4 to make a play for Rocket Fuel? There’s nothing compelling about the tie-up from a product perspective. In fact, Gravity4’s core offering – a data management platform – is largely duplicative of what Rocket Fuel obtained in its purchase of [x+1]. Also, Gravity4’s founder and CEO, Gurbaksh Chahal, has never managed a company of that size and his legal trouble would be a distraction for a business trying to turn itself around – he was fired from his last CEO post after pleading guilty to battery and currently faces a gender discrimination lawsuit from a former Gravity4 employee.
There’s also no precedent for a deal like this. According to 451 Research’s M&A KnowledgeBase, since 2002 only 14 businesses have been taken off the Nasdaq or NYSE exchanges in a cash acquisition of more than $200m by a private company in a deal that didn’t involve a private equity firm. The median age of the acquirer in those deals: 18 years. The youngest was Novafora, which bought chip maker Transmeta for $255m in 2008 and went out of business itself the next year.
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