"As a result of the stock appreciation of PFSW and the stock decline of SPDC over the past 12 months, the Ebitda multiples of both companies have now converged to a point where a combination of both companies is doable," Engine managing partner Arnaud Ajdler wrote in a letter to the boards of both companies made public on Monday. "The historical reason for not merging the companies is no longer an obstacle."
PFSweb stock has climbed from about $9 at the start of 2014 to $12.19 Tuesday morning, putting its market cap at about $190 million. Speed shares have declined from about $4.60 each at the beginning of the year to $2.99, with its total equity worth about $215 million. Both companies' valuations have settled at about 10 times Ebitda.
After restructuring by Speed, the companies have nearly identical businesses providing e-commerce services to retailers and manufacturers.
In addition to the similarities in the businesses and valuations, Engine noted, the Dallas-area companies are close enough to combine operations. They even share the same outside investor relations firm, which did not respond to requests for comment.
Engine projects that a combination would produce $12 million in savings. At a multiple of about 10 times Ebitda, the firm states that eliminating the costs would boost the combined valuations by $120 million, or 30%. When considering the opportunity to expand revenues, Engine suggested, the value could increase by more than 50%.
The companies are the No. 2 and No. 3 behind eBay Inc.'s (EBAY) unit focusing on businesses and other large customers. Combining them would create "a juggernaut in the space that would be the unequivocal number-two player behind eBay Enterprise," Ajdler wrote.
The activist suggested in his letter that the merger would not pose antitrust problems because the industry is fragmented and Ebay would still be larger.
Engine is not the first shareholder to nudge Speed. Red Alder GP LLC filed a 13D with the Securities and Exchange Commission in June, calling the shares "undervalued." In July, Red Alder and Speed announced an agreement under which the company would expand its board, among other provisions.
The companies have been on different trajectories this year.
PFSweb has won new contracts to market the U.S. Mint's numismatic products, the Urban Decay line of cosmetics from L'Oreal Group of Paris and Japanese company Airweave Inc.'s luxury bedding products.
Speed is expanding its sales force. The company announced in September that it had hired Oracle Corp. (ORCL) executive Mark Steele to head its sales and marketing team.
The Richardson, Texas, company has restructured this year, and focused the business on e-commerce. In July, the company sold its distribution business segment to WYNIT Distribution LLC, concentrating its operations on e-commerce services.
Speed also paid $55 million for order fulfillment and customer care group Fifth Gear in November, which substantially expanded its business. The company has also spent millions to upgrade its Columbus, Ohio, warehouse, which could benefit PFSweb.
PFSweb been an active buyer. In September, the company purchased digital creative agency and e-commerce tech group LiveAreaLabs and systems integrator REV Solutions.
More deals could be in store. Ajdler's letter noted that while PFSweb CEO Mike Willoughby is more of an operating executive, Speed CEO Richard Willis is strong in mergers and acquisitions. "We would therefore envision the combined company to be led by Mike Willoughby as CEO with a particular focus on day-to-day operations and by Richard Willis as Chairman with a particular focus on M&A," Ajdler wrote.
While there could be more acquisitions of smaller groups, one person familiar with the companies noted that Willis has previously set companies up for sale. "A lot of people signed up for the Speed story because of Richard," the source said.
Willis was president of Shoes for Crews LLC, which private equity firm AEA Investors LP acquired from Advent International plc in 2010. He was also CEO of books, video, music and game distributor Baker & Taylor Corp., which Castle Harlan Inc. acquired for $455 million in from Willis Stein & Partners in 2006.