Why the New Owners of the "Vampire Diaries" Ad Agency Might Be Looking for Layoffs
Why would ZelnickMedia buy Alloy Inc. (ALOY) for $126.5 million, a 14 percent premium on its stock price, when the company does nothing but lose money and has an accumulated income deficit $322 million?
One possible answer -- which Alloy's employees might swallow hard upon hearing -- is that Zelnick believes it can run Alloy's business more cheaply, with fewer employees, than CEO Matt Diamond has been doing. That's what usually happens in ad agency acquisitions: You get rid of the duplicated back-office functions, examine every aspect of the business's costs and revenues, and cut back on the flabby bits. Layoffs could be looming at Alloy.
That's not the entirety of Zelnick's plan, one hopes. But the company has a strong incentive to get costs out of Alloy because of the high price it paid: If you assume that the transaction was priced so that Zelnick added the debt to its acquisition costs and minused out Alloy's cash (just $23.6 million, unfortunately), you can see that the full cost to Zelnick could be closer to $425 million over time. That's just more than twice what Alloy takes in as revenues each year -- and a lot of money for a company that doesn't make any profits.
Sure, Alloy is on the cutting edge of branded content advertising. It created Gossip Girl, The Sisterhood of the Traveling Pants, The Vampire Diaries and Pretty Little Liars. But $425 million is a lot of money just to be trendy. The more press-friendly part of Zelnick's plan can be found in the management changes that accompany the deal, Adweek reported:
As part of the transaction, Geraldine Laybourne, the former CEO of Nickelodeon, is joining the company as chairman. Former COO of Marvel Entertainment Bill Jemas will serve on Alloy's board and work closely with the company on merchandising, content and business affairs.The LA Times notes there are some cross-selling synergies to be had with Zelnick's video game properties:
ZelnickMedia, co-founded by entertainment executive Strauss Zelnick, is perhaps best known for orchestrating the boardroom coup at video game publisher Take-Two Interactive Software in 2007. Take-Two's Rockstar Games develops the Grand Theft Auto video game franchise and is the creator of the recent hit title Red Dead Redemption.One assumes that Laybourne et al. will link its clients up with Zelnick's various other properties, taking a greater share of their marketing dollars.
I recently suggested that Alloy has to prove it's actually a business and not an acquisition target. Well, the second half of that prediction came true. But can Zelnick get the first half right on mere synergies alone? I doubt it. A look at Alloy's income statement -- where total operating expenses and service costs are more than equal to the price Alloy is selling them for -- begs for the scalpel. Update your resumes, Alloyians.
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