Will these acquisitions pay off?

A FEW acquisitions of digital marketing-related firms by listed companies have brought the sector into focus. While these smaller firms are attractive for their ability to capture the attention of younger consumers, will they pay off?

The space is highly competitive, and the low entry barriers, given the relatively small capital expenditure required to build sites and followings, add to the challenge.

This week, loss-making PUC Bhd said it will be spend RM100mil, in shares, to buy the little-known digital marketing and business management consultancy Alevate Solutions Sdn Bhd (ASSB).

ASSB provides marketing, advertising, promotions and digital solutions software services, which PUC claims align closely with its current operations.

ASSB’s owner, Tham Lih Chung, will end up with 800 million PUC shares, giving him a 22% stake.

The RM100mil price tag values the target company at around 16 times its earnings, based on the profit guarantees provided.

Tham’s profit guarantee is that ASSB will achieve “a minimum aggregate profit after tax of RM12.5mil for the Jan 1, 2025, to Dec 31, 2026, period.”

Given that the profit guarantee covers a two-year period, we can assume each annual profit will be around RM6.2mil.

PUC explained that its valuation was based on comparisons to companies like Catcha Digital Bhd, which notably trades at a historical price-to-earnings ratio of around 28 times.

It is interesting to note that Catcha is also on an acquisition spree. Of its three recently announced acquisitions, it is paying the most for Drive 2 Digital Sdn Bhd, a digital media and advertising company focused on the automotive sector.

Catcha is paying RM16.2mil in cash for a 60% stake in the company, taking vendor shares.

It remains to be seen if the investments in these digital advertising-related firms will deliver the expected returns, considering, as explained, the highly competitive nature of the space and the relatively low entry barriers.

Coming back to PUC’s deal, it is noteworthy that the shares issued to Tham are priced at a whopping premium of 212.5% to PUC’s share price of four sen.

This is out of the ordinary, in the sense that why would a seller agree to receive such highly priced equity?

Perhaps, in some way, this premium evens out the lofty price tag for ASSB stake.