How Much Higher Can Omniture Bid Fetch? (OMTR, ADBE, MSFT, GOOG, TWX)

Omniture Inc. (NASDAQ: OMTR) seems like another niche ad-tech play that has gone on over the recent years, but it could possibly be much more.  Adobe Systems, Inc. (NASDAQ: ADBE) gave a $21.50 per share cash tender buyout price valued at some $1.8 billion.   What is interesting is that there is already a thought over whether the company deserves to get a higher price.  The company’s online marketing suite and other operations make it an interesting acquisition for anyone wanting to get further into advertising intelligence for business optimization that allows for smarter and smarter marketing.

Following Adobe’s agreement to acquire Omniture, there is already some speculation that a second bid could be coming.  Which firm that could come from is up in the air, but Microsoft Corp. (NASDAQ: MSFT) is one of the names thrown into the ring.  Google Inc. (NASDAQ: GOOG) is another which could conceivably pursue this deal.  Google might want to grow its own or  think it doesn’t need to buy Omniture since it already has such a giant share of search and gets all the data mining the online population.  With Time Warner Inc. (NYSE: TWX) being a client for AOL, that could be a possibility, but the pending break-off there makes that less likely.  Omniture lists eBay, AOL, Wal-Mart, Gannett, Microsoft, Neiman Marcus, Oracle, Sony and HP as its anchor clients.

We were told by a contact that JMP Securities was one of the firms which thinks another bid is at least possible, yet there are many who doubt it or who do not care about the thought.  Today, we have seen analyst downgrades after the deal announcement:

• Cut to Sector Perform at Pacific Crest;
• Cut to Hold at Canaccord Adams;
• Cut to Market Perform at BMO Capital;
• Cut to Neutral at JPMorgan;

What is interesting is that the stock has traded above the buyout price the entire day.  Shares opened at $21.61 and had a low of $21.57.  Now shares are up at $21.94 and briefly traded as high as $22.05.  For some color, the 52-week high was $22.45, but the highs back in late-2007 were actually north of $30.00.

When you see a share price trading north of its purchase price, there is generally a belief that there is a chance of a higher bid that will come either from a competing bid or from the  company making the offer in the first place.  For the last decade I have used a very basic formula for calculating the implied odds of a higher price…

• The first 2% premium during the same calendar week after a deal is announced is usually the “hope” and “speculation” unless there is a much bigger market.  Every 1% above the first 2% deal-premium in that week would generate a 10% mental chance of a slightly higher bid.
• In the calendar week after a deal has been announced, and after the would-be rivals have had a chance to meet with bankers and run figures, then we take the threshold down to a 1% base premium.  Each 1% above the first 1% deal-premium at that point generates a 10% expectation that a higher buyout from a rival or the firm would come.  So when you see stocks trading more than 10% above a buyout price, it implies that there the market is factoring effectively a 100% chance of a higher bid or a rival bid coming into play.

Based on that formula or scenario, that gives almost but still less than a 10% chance of a higher bid in our minds.  If this price holds up into next week, we’d be looking at between a 10% and 20% chance of a higher bid coming.  I have always rounded up in those figures, and again these are just basic assumptions as a starting point.

A second method here is to use the premiums in the closest out-of the-money Call options.  Unfortunately, September-2009 CALLS expire this Friday, so the $0.05 price would give a very low chance of a buyout.  Effectively, that means the market maker for the option expects effectively no trades above $22.55.  If we were assigning a value to that, this would also imply less than a 10% chance of a higher bid coming, but that would only imply that the under-10% is through the close of this Friday.  And the data on PUT/CALL strike prices is too thin in the coming months to offer more color here.

Mergers usually take weeks to months to close and any deal can change at any time.  But the odds of a higher price coming here in the immediate future seem fairly low based upon an internal model and based upon options trading.

Adobe is down over 6% at $33.32 and is nowhere close to its 52-week highs like so many other key NASDAQ stocks.  Its market cap after today’s drop is $17.5 billion.

Jon C. Ogg
September 16, 2009