aQuantive Deal Fails to Click

Investors await earnings reports from the online ad company and from its rival, ValueClick.
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dropped 6% Monday amid reports of failed merger talks with




Neither online ad firm could immediately be reached to comment on the news, which was first reported in

The Wall Street Journal

. But Monday's selloff reflects the surge in aQuantive shares last year and the current Wall Street view that the stock is fully valued even as the company's business continues to grow robustly.

ValueClick jumped 20 cents to $17.48, and aQuantive fell $1.62 to $24.

The companies' first-quarter earnings, due out after the market closes Monday, are expected to show how both firms are benefiting from the rising popularity of online advertising. Marketers are expected to increase their spending on the Web, which was $12.5 billion last year, by 26% this year. Though this benefits ValueClick and aQuantive, it's also drawing the interest of large advertising agencies including


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Interpublic Group

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"Fueling above-average secular growth in online advertising and its share gains from traditional media is the rise of Web-centric ad campaigns, growing broadband penetration, increasing demand for rich media and video advertising, and international expansion," writes Bear Stearns analyst Julia Choi, in a recent note to clients.

aQuantive in particular has benefited from Wall Street's love affair with online advertising. Shares of the Seattle-based company jumped 182% last year, though they're down 3% for 2006. Shares of Westlake Village, Calif.-based ValueClick rose 35% last year and also are down 3% this year.

For now, Wall Street sentiment has shifted to ValueClick. Analysts are expecting the company to say it made 11 cents a share for the quarter, as revenue more than doubled to $112.2 million, according to Thomson Financial. Most Wall Street analysts urge investors to buy ValueClick and hold aQuantive shares.

Shares of aQuantive are trading at an enterprise-value-to-EBIDTA multiple of 21, compared with ValueClick's multiple on that basis of 18, according to Yahoo! Finance. aQuantive's price-to-earnings ratio of based on next year's projected earnings is 42 compared with ValueClick's 25.

"We believe ValueClick currently offers one of the best risk-reward profiles in the Internet sector," writes Aaron Kessler, an analyst with Piper Jaffray, in a note last week to clients. "Solid Q1 results with modest upside, a recovery in sentiment in the Internet group, and increased visibility into 2006 estimates should serve as catalysts." He rates ValueClick buy.

Kessler is bullish on aQuantive as well, but he argues that better-than-expected results have already been factored into the stock. He rates the shares market perform. His views are echoed by Choi of Bear Stearns, who rates aQuantive peer perform.

Wall Street is expecting aQuantive to earn 6 cents a share on sales of $84.6 million, Thomson Financial says.

Earnout payments of up to $75 million will likely turn free cash flow at aQuantive negative this year, Choi writes. In addition, margins at its Atlas unit, which manages advertising campaigns, is facing increased competition which is depressing margins, she says.

"We believe that the company is poised to benefit from its exposure to the Internet and has done a good job building and demystifying the business over the pas few years to deliver a full suite of agency and technology services," Choi writes, adding that aQuantive shares appear fairly valued.