Stamps.com’s Survival May Hinge on Takeover Appeal
By MICHAEL THURESSON
Staff Reporter
Battling to prove it’s not simply a lucky relic of the Internet bubble, Stamps.com Inc. may find its ultimate success with the end of independence.
The Santa Monica-based company, founded in 1996, was among the collection of high-flying Westside companies that rode the bull market in the late ’90s.
But by January 2000 it had slipped to less than $40 per share and bottomed out a year later at about $2. Most recently, the company reported a third-quarter loss of $1.7 million compared with a net loss of $2.2 million for the like period a year ago.
Indeed, the $20 million Internet postage industry of which Stamps.com controls nearly 80 percent pales next to the U.S. Postal Service’s revenues of $66 billion.
How then to account for a run-up that has seen its shares rise more than 25 percent year-to-date and 41 percent over the last 52 weeks?
Analysts, pointing to the company’s 55 patents (and 81 pending), a deal with Microsoft Corp. in which it provides postage on letters created in Microsoft Word, and $265 million in net operating losses since its inception, are paying greater attention to Stamps.com as a takeover target.
While he continues to talk up the company’s prospects as an independent company, Chief Executive Ken McBride is aware of its takeover appeal.
Besides its stable of patents for technologies enabling the creation of Internet postage, shipping labels and online postage meters, the ongoing losses are also alluring.
“Many of our investors view that as an asset of the business that can be used in the future to offset future income,” he said, adding, “There is clearly value there as a tax shield for cash-flow positive companies.”
He did not address the acquisition prospect directly, other than to note that if the board were to conclude any offer “is superior to remaining a stand-alone business, they would try to maximize shareholder value.”
Developing ties
Stamps.com users pay monthly fees from $4.49 to $15.99 for its online mailing and shipping services, ranging from both individual envelops to bulk mailings with pre-established address lists. It sells, at face value, U.S. States Postage Service-approved stamps and labels and also sells postal insurance.
After becoming the first U.S. Postal Service-approved Internet postage service in August 1999, Stamps.com’s monthly subscriber base has grown to 314,000, as of Sept. 30. About a third of its customers come by way of referrals from other Web sites. A research report from B. Riley & Co., which makes a market in the stock, said the bulk of the referred traffic comes from the Microsoft Office Web site.
That traffic is the result of an agreement with Microsoft that was expanded last year in a three-year deal making Stamps.com the exclusive Internet postage provider for the word-processing application Word that is part of Office 2003, released in October after a delay of several months.
As a result of the relationship, McBride said, “We are investing more heavily in sales and marketing this quarter and are expecting $25 million in sales next year compared to $20 million this year.”
The benefits of the Microsoft deal may do more for Stamps.com’s profile than generating revenue.
“The deal gets them some visibility so they don’t have to pay to get their name in front of people,” said Chris Le Tocq, an analyst at Guernsey Research, a Los Altos-based research firm. “As an acquisition target, they’ve got to be looking at that.”
But tax losses and patents may not be enough to offset ongoing losses, expensive litigation costs and a market whose depth is questioned.
In 1999, one of its main competitors, Pitney Bowes Inc., sued Stamps.com for patent infringement related to electronic postage systems. Stamps.com has since countered with patent-related lawsuits of its own. McBride warned that the trial, expected to begin in U.S. District Court in Delaware next year, would drain 10 cents to 12 cents per share off of earnings in 2004.
Angelo Chaclas, deputy general council for intellectual property and technology law at Pitney Bowes, essentially wrote off the Internet postage business, saying it had proven far smaller than anticipated.
He said the litigation with Stamps.com would move forward with little effect on the company. “We are confident we will prevail,” he said. “It’s probably not a material event for us due to our size.”
