VerticalScope Inc. , which operates online message boards for various enthusiast groups, is set to deploy more than $100-million toward acquisitions after a strong initial public offering.
The Toronto-based company specializes in running online forums that cater to niche interests. Many of its communities are product-focused: BenzWorld, for fans of the German automaker; SailNet, for nautical enthusiasts; Aquatic Plant Central, for those who want to deck out their fishtanks.
In June, the company’s shares went public on the Toronto Stock Exchange in an IPO that was upsized from $100-million to $125-million to meet investor demand. An overallotment option was exercised in full, and the IPO raised $143.8-million in gross proceeds. Shares have jumped more than 23 per cent since the stock debuted at $22. Last week, three analysts began covering VerticalScope, and gave it ‘buy’ recommendations.
The company plans to deploy all $135.2-million of its net proceeds to acquire more online communities, adding to an already large portfolio of more than 1,200 websites and 100 million-plus monthly active users, mostly in the U.S.
“We believe VerticalScope is well positioned to accelerate M&A over the next three years capitalizing on a robust pipeline of potential tuck-in acquisitions,” wrote Drew McReynolds and Riley Gray, analysts at RBC Dominion Securities Inc., in a recent note.
Chris Goodridge, VerticalScope’s chief operating officer, said the company is actively looking at 60 potential acquisitions of varying sizes that it hopes to close in the near future.
“We can have communities that have multiple millions of monthly active users, but we also will acquire sites that have between 50,000 and 100,000 monthly active users,” he said.
VerticalScope has paid sums as modest as $25,000 for online communities, all the way to north of $20-million. Rob Laidlaw, the company’s chief executive who founded it as a teenager in 1999, said that discipline is key to success.
“The model is quite consistent,” he said. “It’s really based on being able to stay disciplined on the prices that we’re willing to pay for acquisitions, really understanding the audiences and the content on the communities that we’re buying.”
When prospecting for online communities, Mr. Laidlaw said that VerticalScope avoids anything that has to do with politics. Forums that focus on hot-button, polarizing issues can create problems for advertisers, and makes content moderation – a headache for almost every social-media platform – a major challenge.
The ideal VerticalScope community, he says, has good administrators, a robust user base full of active participants, and one that focuses on products that attract advertisers. VerticalScope generates most of its revenue from advertising, and has attracted blue-chip brands such as Allstate Corp. and Samsung Electronics Co. Ltd. onto its platform.
“The key part of our value proposition for advertisers is that we reach undecided shoppers,” said Mr. Goodridge, adding that many visitors of VerticalScope properties “come to our sites because they’re researching topics, things they want to buy or modifications they want to make to something they already own.”
The business earned US$61.6-million in revenue in the 12 months ended March 31, and saw US$31-million in adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA.
The ability to effectively scale these online communities and boost revenue is what VerticalScope presents to acquisition targets, many of whom run their message boards as a hobby.
“When we approach the founder, they may not necessarily be looking to sell the business, but part of the proposition of working with us is that we can take that community to the next level,” Mr. Goodridge said. He says it can take months, or even years, to complete a deal with founders, who are often emotionally attached to the communities they have built and unfamiliar with the buyout process. Some founders choose to stay involved, while others take away cash and a future with more free time.
In June, VerticalScope acquired Paddling.com, a forum for those who enjoy canoes, kayaks and paddleboards. Mr. Goodridge said VerticalScope first made contact with the founder three years ago.
“Once he turned his mind to it, [it took] six weeks to actually get the deal complete.”
While it executes its M&A strategy, Mr. Laidlaw said the company will continue to launch 20 to 30 of its own communities each year.
“It’s hard to start new communities, but we do it for areas where there’s a new product focus or some sort of new interest,” he said. “When Pelotons started to become popular, we started a community called Peloton Forum.”
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