The Deal: Millennial Shares Dive After Deal News

NEW YORK ( The Deal) -- Shares of Millennial Media ( MM) tumbled more than 18% Wednesday, August 14, after the Baltimore-based company unexpectedly announced the acquisition of rival JumpTap to form a mobile advertising platform comparable to Google's ( GOOG).

Under the mostly stock transaction, JumpTap shareholders will receive about 24.6 million shares of Millennial, or approximately 22.5% of outstanding shares, Millennial said August 13, after the close of regular trading.

A cash consideration of slightly under $12 million will also be made to shareholders of JumpTap, the second-largest independent mobile advertising platform in the U.S. behind Millennial. According to a statement issued by Millennial, JumpTap's enterprise value is approximately $232 million, based upon Millennial's August 9 closing price of $9.13 and the $12 million cash consideration.

"Long term, I think this makes sense because scale matters, and this brings scale," said James Cakmak, a Telsey Advisory Group analyst. "It makes them a much more formidable player. But there's a lot of questions that have surfaced in regards to timing and pricing and financial potential."

According to International Data figures, the new entity will push Millennial's mobile advertising market share to about 28.7% from 18%, putting its share at a level comparable to powerhouse Google, Millennial CEO and co-founder Paul Palmieri said in a Tuesday earnings call with investors.

Still, shares of Millennial, which trade on the New York Stock Exchange under the symbol MM, closed down 18.82%, to $6.90, on Wednesday.

Clearly, the JumpTap acquisition didn't sit well, because on Tuesday, Millennial reported second-quarter revenue of $57 million, a 45% jump from $39.4 million for the same period a year earlier.

Why the investor backlash? Cakmak explained that even though the scale advantages are clear, "the valuation for JumpTap could be slightly rich as compared to other ad-tech companies in the space."

He also said investors may be disappointed because, despite the 45% rise in quarterly revenue, an even-higher increase -- to $59.23 million, according to consensus estimates -- was expected.

The acquisition of Boston-based JumpTap is expected to close in the fourth quarter, subject to regulatory and shareholder approval. Upon completion, JumpTap CEO George Bell will join Millennial's board of directors as vice chairman.

JumpTap generated annual revenue in 2012 of about $63.6 million, according to Millennial.

"Digital media has proven before that scaling up early, in the face of large markets, creates outsized rewards for the winners," Palmieri said in an emailed response to The Deal Pipeline. "As mobile overtakes the PC in consumer media consumption and advertising, acquisition fast-tracks MM toward that outsized reward in a massive market."

Cakmak, however, didn't expect a deal between the two companies. He had thought other players such as Yahoo! ( YHOO), would have been more likely to buy JumpTap, noting that the Internet search engine company would benefit from a mobile asset to revamp its advertising.

"It wasn't that much of a surprise that JumpTap was a target," he said. "The bigger surprise is that Millennial was the acquirer. I didn't think that they would be serving as the industry consolidator because of their relative share gains with competition."

Shares of Millennial had fallen almost 30% this year through August 9, even before the deal announcement. Yahoo!'s shares, meanwhile, have jumped about 34%. Millennial has only been public since March 28, 2012.

In a much smaller deal, Millennial acquired a mobile media marketing application business, Metaresolver, on April 5. Though terms of that transaction weren't revealed, trade press reports valued it near $10 million.

-- Written by Sarah Pringle in New York