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It had never happened to me before so I was surprised when it finally did. It was almost a cliché. But I got on a plane the other day to Las Vegas, where I had to give a talk at a conference, and the guy sitting next to me just wouldn’t stop talking.

Basically, he was coming back from Geneva. Geneva, hmmm – maybe a banker? No, my new friend (call him John) had apparently not worked a day in 20 years, since he had inherited his Dad’s fortune. He had gone to Geneva to meet a girl. He had been corresponding with this girl for five years online. When he flew out there, though, he found out she was pregnant. And the husband (!!) was living in China and wanted the baby. And she wanted to give it to him and then come to the US to live with John. He was distraught. He thought she was being deceptive. He left Geneva to return to the US.

“But,” he was telling me, on his fifth glass of wine, “I can’t get her out of my mind.” I really wanted him to be quiet. I had eight episodes of Sleeper Cell loaded into my video iPod.

“John,” I said to him, “you have to get over her. Forget it. Stop thinking about it. Just go to sleep.”

He started sobbing. “I can’t. I just can’t. She keeps e-mailing me.” He buried his head in his hands. “And I can’t help e-mailing back.”

And therein lies the crux of our problem. E-mail. And the other seductive wiles of the internet.

Back when John started e-mailing his friend, 24/7 Media was a 30-cent stock, Doubleclick was trading for less than the cash they had in the bank, and Aquantive, then called Razorfish, was either bankrupt or verging on it. Internet investing conferences were ghost towns and within a 10-block radius of my office, more than 150,000 jobs had been lost.

But it is clear that the internet is now where everyone is making all their critical decisions, whether it is to get married to strangers to or to buy the new Harry Potter novel. You need to advertise on the internet to survive and grow. Now Doubleclick has been bought for $1bn, 24/7 Media is getting bought for $700m and Aquantive is back from the dead and being acquired for $6bn.

When life is good, the cup spilleth over. So it is still important to look at other online advertising plays to see who could get acquired next. And with ad giant WPP buying 24/7 Media, it is clear it is not only the big internet players that need to make acquisitions, but also other media companies and ad agencies.

Obviously Valueclick is in the running. Valueclick handles every aspect of an online advertising campaign, from banner ads through e-mail marketing to lead generation. Back in 2001, Valueclick and Doubleclick were both trading for less than the cash they had in the bank. And they were even worth shorting at that point, as they both continued to trade lower until 2003. Now they are the darlings of Wall Street and Valueclick is almost certainly next on the seller’s block. Analysts expect earnings to be 81 cents per share this year, up from 62 cents in 2006, a 30 per cent gain. With a forward price/earnings multiple of 30, I can see it fetching $4bn from a company like Microsoft, a 30 per cent premium from where it is now.

One of my favourite value-oriented mutual funds owns Valueclick: Al Frank Asset Management, which tends to own companies trading below cash and then hold onto them until their intrinsic value is reached. Apparently they do not feel Valueclick’s intrinsic value has been reached. They have had a 16 per cent annual return since they opened in 1998.

Further down the chain, but not an unreasonable acquisition for an Interpublic or Omnicom, is Think Partnership. This is a rollup of online ad agencies, search marketing companies, and ad networks. They have a forward p/e of 14, new management in place and aggressive growth anticipated by analysts.

Next comes e-mail marketing company and CRM software company, InfoUsa. You might have seen their Salesgenie.com commercials in the past SuperBowl. When they acquired Yesmail they became the largest e-mail marketing company in the world. They trade at just eight times cash flows and activist hedge funds have been pushing for the company to sell itself.

I also like Harris Interactive, which provides market research and online polling for companies, which is always a complimentary offering next to online advertising. The company has $30m in cash, $25m in cash flows, and just added $25m to its already existing $55m share buyback plan. Altogether, they plan on cutting their existing shares by 15 per cent, slowly taking themselves private.

Is it a bubble? Of course not. Back in 2002 there were tears shed for jobs and fortunes lost. But those tears, just like the lost jobs and fortunes that caused them, were shed too soon, just as the fortunes were created too early. Five years later, online advertising revenues are expected to hit $20bn this year, with those numbers doubling in the next five. Now, after all this time, the tears caused by the internet are all too real.

james@formulacapital.com

Copyright The Financial Times Limited 2017. All rights reserved.
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