Targeting Low-Priced Internet Takeovers

In the wake of News Corp.'s(NWS) bid for Intermix (MIX) in July, we scoured the low-priced stock universe for other Internet takeover candidates that were attractively priced relative to this deal.

We recommended three companies to Stocks Under $10 subscribers -- PlanetOut (LGBT), CNET (CNET) and Miva (MIVA) -- that were undervalued relative to the double-digit percentage premium News Corp. proposed shelling out for Intermix. (A former CEO has since offered a competing bid for Intermix.)

Since that time, PlanetOut shares have fallen 40%, although we advised subscribers on Aug. 3 to exit the position about 2% above the current quote; CNET shares are up 12%, and Miva has added 5%. But our thesis that larger media companies are on the acquisition hunt was confirmed when News Corp. said in early August it would spend up to $2 billion on Internet acquisitions. And Google (GOOG) could be on the prowl because its recent 4 million-share secondary offering took its cash balance to more than $6 billion.

With that in mind, we want to reiterate our buy recommendations on CNET and Miva, and add iVillage(IVIL) to this list of potential Internet takeover candidates. iVillage, through its family of Web sites, provides lifestyle and entertainment content primarily for women. The stock was recently trading at $6.85 and appeared on our radar screen after the company delivered upbeat second-quarter earnings results.

Potential acquirers could find a lot to like in iVillage: impressive growth in ad sales, and a loyal base of users who are attracted to the site for its female-oriented content. The company had 14.2 million unique users in June, vs. about 100 million users for CNET, and was ranked the No. 1 online women's community by traffic counter Media Metrix.

iVillage should deliver positive EBITDA of $17 million to $18 million in 2005, based on management's guidance. The company has wisely shied away from a subscription revenue model, which should lend itself to a higher sales and earnings multiple.

(The market has punished companies for under-delivering on subscription revenue. PlanetOut's shares recently took a 15% hit after it reported a subscription-revenue shortfall, and Interactive Corp. was forced to split into two companies in order to achieve a higher valuation after it, too, reported declining subscription revenue.)