For the last six months I have been tracking the industry movements of ITEX. Most of the real action started when Steve White became the CEO. Steve is a savvy marketer and someone with vision. In a conversation with him in March, I learned that his aspiration for ITEX is much larger than the inudstry normally conceives. Steve wants ITEX to transform the way business is done in the United States.
Evidence of this became clear when ITEX started working with then-Idearc, now-SuperMedia. The original objective, according to press releases and Steve White, was to provide the software for SuperMedia to create their own trade exchange, to be named SuperTradeExchange. SuperMedia, with a struggling flagship product (yellow pages phone book – formerly the Verizon Pages) and a new market cap of 6.5 billion dollars post-bankruptcy, seems poised to acquire and manage new business models…
To SuperMedia, barter has probably always been a way of doing business, but not generating revenue. From an Idearc SEC filing December 2006:
We enter into certain transactions where a third party provides directory placement arrangements, sponsorships, or other media advertising in exchange for placing their advertising in our print or online directories. Due to the subjective nature of barter transactions, we do not recognize revenue and expense from these transactions. If recognized, revenue associated with barter transactions would be less than 2% of total revenue.
With revenues approaching 2.5 billion dollars, 2% of SuperMedia’s internal barter campaign would equal a minimum of 25 million dollars in media bartered in a direct fashion.
This next part is a guess – I would assume that someone at SuperMedia used to be part of the barter industry. Many of the people I have known in the barter industry over the years have migrated in and out of media while they migrated in and out of barter. This person looked at that number and said, first to themselves and then to someone who had some kind of decision making power, “We have a database of 18 million businesses. We already barter 25M, large, every year. Why aren’t we making more money from this?”
Then is born SuperTradeExchange. According to Steve White of ITEX, SuperMedia went through a long period of investigation, looking for the best software and the company that could help them manage and create their monster barter exchange. ITEX happens to be the biggest, has internal software, and a large broker network to handle the business. After the period of investigation, ITEX gets the contract.
According to an ITEX broker I spoke with recently, one of the big complaints of ITEX franchisees is that corporate resources are being diverted to the STX offices. The office listings on the STX website show at least one ITEX corporate office handling the transactions of an STX area.
Next comes the reverse stock split. If you owned five shares of ITEX stock, now you own one. The reasoning behind the reverse split (presumably) is to increase stock value, get listed on the NASDAQ, and increase the visibility and the perceived value of the company. The reverse split also decreases the number of minority shareholders, giving the current management more leeway in decision making power. But what else is behind the reverse split?
I assume SuperMedia would agree to an ITEX buyout with a couple of caveats. First, it can’t just be something nice to add to the pie, ITEX would need to bring substance. 60 cent shares aren’t going to do that. Neither is a paltry (compared to SuperMedia’s revenue) couple million dollars in revenue. What ITEX does bring to the table, though, is a tough corporate staff, a debt free company, and the ability to leverage a niche that SuperMedia never has.
That being said, the original plan of SuperMedia was to run the SuperTradeExchange in a brokerless, online-only environment. For those that are familiar with the past of the barter industry, we know that that model doesn’t work. Big Vine and All Business Barter are the notable failures with that same model.
After messing around with the online-only format, ITEX, I assume, striked up a new deal to provide brokering services to those STX clients. THIS creates value for SuperMedia. Now they are dependent. Now they NEED ITEX to be able to continue to operate profitably.
An increased stock value, a debt free company, filling a genuine need…these are all very valuable to a company that doesn’t foresee a time when yellow pages are going to the be the medium of choice for information gathering.
But what happens to the franchisees? Where do they go?
This is the question, unanswered, that the future has to show. What does Steve White anticipate as part of the buyout? One would assume that SuperMedia would not want to use cash to buy the company, but leverage stock instead. Certainly SuperMedia, with a business database of 18 million, has much to gain from a successful and prosperous barter exchange.
The current franchisees may or may not be a part of the long term future of ITEX. Whether or not SuperMedia would replace them is good question, and if they did, who would they use in their place? Would ITEX convert the franchisees to employees, or would the current arrangement still stand?
Whatever the future is for ITEX, and my opinion is a leveraged buyout by SuperMedia, they remain the biggest exchange in the United States.