Macromill Inc: Future of Digital Online Research
Here at Morphic we have been thinking of late about the legacy of life in today’s digital world. In both personal and business activities, humans are leaving ever more digital footprints reflecting interactions with people and IT systems. Some are obvious, such as sending emails and visiting websites. However, it appears that we leave a growing number of footprints which we are not even aware of.
Websites and social media, both on computers and mobile devices, are using ever more sophisticated software that records our actions and apparent preferences, be it for preferred fashions when shopping for clothes, or political opinions expressed by casual chatting on social media. It is easy to imagine that this data has a considerable value to advertisers, marketers and other opinion influencers.
This is relevant to us in many ways and we are successfully adopting some of these techniques in our own digital marketing strategy. For example, our digital advertising can be targeted at specific groups of potential investors via social media platforms and is more cost-effective than traditional methods. Digital tools can also make it easier to engage and follow up with viewers that respond positively to our advertisements and content. In our business, as in others, these digital tools can substantially lower customer acquisitions costs.
We also recognise the potential investment opportunity presented by the companies that are developing new digital tools and techniques. Clearly the largest companies have sufficient resource to invest in their own digital marketing. However, small and medium sized enterprises may be resource or simply knowledge-constrained. Here in lies the opportunity for those companies that provide digital tools and services under the more traditional label of advertising, marketing or brand management. One such company is one of the newest additions to our portfolio, Japanese-listed company Macromill Inc.
Macromill provides online market research and digital marketing solutions. The Company’s roots are in its market leading position in domestic online market research which is underpenetrated relative to other markets, and is growing at circa 7% per annum. The 2014 acquisition of Dutch company MetrixLab broadened the product offering and geographic scope with digital marketing being a faster growth area (>10% per annum) reflecting the pace of technological evolution. The business has high and growing margins. We believe that the Company’s guidance of 10% revenue growth for the next three years is realistic and that margins can expand further such that free cash flow in combination with growth suggest the value of the Company can compound at 10-15% over this period.
A key assumption in our investment thesis is that the Company has a point of differentiation with the giants of digital data such as Facebook, Google and IBM. We continue to test this assumption and are cognisant of the technology risks that are specific to this business model.
Initial Public Offering
As active asset managers we are, by definition, convinced that equity markets are far from the theoretically perfect price setting mechanism. The way in which we invested in Macromill provides further proof of the market lacking efficiency. The Company’s private equity owners (Bain Capital) recently decided to reduce their ownership, selling some of their shares to new investors via the common route of an Initial Public Offering (IPO).
After a period of investor education, the appointed Investment Bank (aka Book-Runners) seek investor interest in terms of the price at which they would be interested in investing. If the selling shareholders agree, typically a price range is announced and investors submit orders indicating how much and at what price. Once the offer period closes, the advisors determine the price at which the seller is satisfied. Hereafter the process is less opaque as our experience illustrates.
The Book-Runners indicated that the “book was covered multiple times with no price sensitivity”, i.e. there was more than sufficient demand to sell all of the shares at any price within the range. We analysed the Company, had a view on its worth, and submitted our order. Demand was such that we were not allocated any shares rather the Seller and Book-Runners favoured their largest clients, no doubt assuming that the larger the client, the more committed a long-term shareholder they must be!
Fast forward to the first day of trading. Imagine our surprise and delight when the share price debuted with an immediate fall, closing its first day’s trading a little above 15% below the price of the IPO. As well as indicating a less-than-perfect process of price determination, it gave us an opportunity to invest at a price considerably below what we were willing to pay in the IPO.
Figure 1 - Macromill Inc. (3978 JP) / ACWI US
How can this be explained? Some of those large clients suddenly had reasons to not be long-term committed shareholders. Of course, that there was not an immediate profit to be bagged would have had nothing to do with their decision to sell! In our opinion, this is simply another example of an opportunity available for active managers to arbitrage the short-termism of some investors versus a willingness to be a long-term shareholder. Also, we cannot help but feel that such opportunities will increase due to the oft mentioned increasing dominance of passive investors, who will by definition participate in an IPO at any price if the company is to be included in the indices that they track.