Millennial Media Tanks On Jumptap Acquisition: Here's Why Investors Are Wrong

Shareholders of Millennial Media jeered the mobile ad company's acquisition of Jumptap, a rival mobile ad company, today, as shares in MM fell 8% to $8.50 in post market trading.

Investors appear to be reacting to the fact that Millennial is issuing 24.6 million new shares of stock to Jumptap holders, replacing all their equity in the latter company. That's a major dilution of MM — it's 22.5% of the entire combined company.

But the decline in the stock price ignores the debate between profits and scale. I've noted previously that Wall Street, which favors profits, has punished mobile and other adtech firms for not showing profits, despite their increasing size. These firms must demonstrate that with greater scale comes greater profitability — otherwise what's the point?

On that basis, the Millennial-Jumptap deal looks dysfunctional. Jumptap had revenues of $63 million in 2012 and lost $13 million. It joins with Millennial, which lost $5.4 million on revenues of $178 million in the same period.

But the investor deck suggests that the combined company might be instantly profitable because it will realize up to $25 million in annual savings by 2015, according to MM CEO Paul Palmieri, by cutting duplicate jobs and functions.

That, in fact, is the point: The bigger these operations get, the more efficient they can become.

The deal could signal a much-needed wave of consolidation in the mobile ad business. There are dozens of these companies. They all do kinda the same thing. They don't all need to exist. Some of them simply need to be acquired or killed.

And note what didn't happen in the transaction: Millennial spent zero cash. Its balance sheet still shows $122 million in cash, much of which it got from going public in the first place. In other words, Millennial has just increased the size of its business by greater than 50% at no cash cost whatsoever.

Few other companies can say they've achieved the same thing. That's a reason to own MM, not sell it. This is a company that looks like it is actually creating the scale needed to generate meaningful profits in the long run.

As for Jumptap, the deal finally gives the company the exit it has been looking for. An IPO has been expected since 2012. But the company's revenues as disclosed are far below the previously provided estimates of $75 million. The company also loses more money than Millennial, even though it is smaller. The value of the deal is $200 million. The company had taken $122 million in funding. Presumably, Jumptap holders' new Millennial stock functions as a premium on their old Jumptap stock.

If so, Millennial has solved a lot of Jumptap CEO George Bell's problems with a single handshake.