Private equity firm Hellman & Friedman owns Getty Images after taking it private earlier this year.  If you will recall, the two companies had been in merger talks in the past for far higher prices.  Those talks quickly broke apart.

Jupitermedia’s board of directors has approved the transaction and hasrecommended that shareholders approve the deal as well.  This issubject to shareholder approval as you can tell, but the deal also hasto clear regulatory approval and customary closing conditions.  WithMr. Meckler and certain holders, the company said it already has 35.9%of the outstanding votes lined up to agree to the deal.

Jupitermedia will retain ownership of its Peoria, Illinois building andproperty and will in turn lease the facility to Getty Images after thetransaction. Jupitermedia said that it expects to incur a non-cashloss of approximately $95 million upon the closing of the transaction.

So what will be left at Jupitermedia?  Jupitermedia will continue to operate its Online media business of five networks: internet.com and EarthWeb.com for IT andbusiness professionals; DevX.com for developers; and Mediabistro.comand Graphics.com for media and creative professionals.

While this will result in a huge charge, the company says that thiswill allow it to repay all of its bank debt.  As of yesterday’s close,its market cap was a mere $19.6 million.  As of June 30, the companyhad only about $7.3 million in cash and long-term investments, and ofits total assets of $280.1 million it had more than $210 million asgoodwill and intangibles.  Of its $123.7 million in total liabilities,$79 million was direct long-term debt.  This will result in a massiveshrinking of the balance sheet, but it will also remove the distortionof past carrying values and intangibles to reflect an easier tounderstand set of books.

Traders are really responding favorably here.  Shares closed yesterdayat $0.54 and the 52-week trading range is $0.39 to $5.99.  Shares areup more than 80% at $1.00 in pre-market trading.  This will be gettingrid of a large portion of the business and may be for a far less pricethan what the stock photo business would have fetched in the past, butit also turns the company into a niche content player with no real debtand a much cleaner operation.

Jon C. Ogg
October 23, 2008

Getty, and Bill Gates’ Corbis, has perhaps the easiest business to attack with a wiki-model business out of anyone out there.  I have estimated that their model could be attacked by anyone employing a wiki-model in a Web 2.0 world for $20,000.00 with operating capital to last 6-months.  An industry contact Augustine Fou, CEO of PictureSandbox.com says this can be done far less: "Anyone with $1,000 can build a web 2.0 service — something as simple as a meta search engine for photos which searches across every available microstock collection. Helping the potential buyer more quickly and easily find and license a photo means that purchase will occur outside walls of traditional stock houses."

Today Getty’s stock didn’t just hit a 52-week low.  At $30.10 it has now given up all the stock gains back to early 2003.  In early 2003 this went from a stock in the high-$20′s and low-$30′s rapidly up to $40+, then $50+ by December 2003, and it reached the $70′s, $80′s, and even the $90′s before the end of 2005.  There is less and less war coverage now and the coverage that requires photos can be had for far less.  But the main area of attack is the non-copyright (royalty-free) event photos in what is becoming more and more royalty-free.  A high resolution picture of a bear eating a salmon just isn’t worth what it was even in 2005.  As media conglomerates merge it creates fewer clients, and any new media start-up out there knows it can get stock photos and digital audio or video media for free or very close to free.

Getty won’t implode, or at least we are fairly sure it has a place in the future.  We sent out our Special Situation Investing Newsletter in early May when Getty Images stock was just above $50.00 with a $36.00 to $38.00 target price by early 2008.  We even gave the options strategy for it as the maximized way to limit risk.  Early in August we sent out an alert after it hit our downward target.  It has continued its slide, even worse than we thought it would.  At some point we feel that this could become an incredible value stock as long as it can stay profitable, but we aren’t about to go out with any call like that this soon.

We are constantly looking at special situation investing opportunities out there for our newsletter subscribers.  We won’t be putting Getty on any reverse list for any private equity or management buyouts in the immediate future, but we’ll be issuing for more and more special situation opportunities that have the same criteria.  Some special situations are buyouts, some are break-ups, some are pending de-mergers wrecking an industry, and others are special situations for other reasons.

Jon C. Ogg
August 15, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Frankly, it is at least refreshing to see a company be honest about the current trends in stock photos.  If they are honest enough, well that is another topic but this at least addresses the compression of the value here and the trends that are coming into play upfront instead of the company trying to explain how it didn’t get it 6-months from now.  This should actually create more and more future writedowns to the value of goodwill and intangibles, and that won’t be good for Jupitermedia with the state of its balance sheet now. 

Getty Images (NYSE:GYI) was the one we felt had the most to lose, partly because they were the largest pure-play in stock photos and partly because the company hasn’t been as forthcoming about the future of these businesses even after it has made recent acquisitions to try to stave off some of the onslaught.  The wiki-model is too powerful here for this sort of business.  It will probably continue to make money and it will have a solid place in many copyright enforced venues, but much of its business will face severe margin compression.  This is an overly simplified explanation for a highly complex issue, but it is what it is.

Here are Alan Meckler’s quotes regarding the trends in the stock photo sector: "Despite a challenging period for the stock photo industry, our Jupiterimages division had some bright spots in the second quarter and for the first six months of 2007. Our Rights Managed category experienced over 30% growth for the first six months of this year compared to the same period of 2006. In addition, our JupiterimagesUnlimited high level royalty-free subscription offering grew over 200% for the first six months of 2007 compared to the same period last year. On a sequential quarterly basis, operating income for our Jupiterimages division increased from $8.6 million for the three months ended March 31, 2007 to $9.2 million for the three months ended June 30, 2007. Due to the evolution taking place in the stock photo industry, we are currently focusing our direct sales team to further emphasize our strengths: sales of Rights Managed images and JupiterimagesUnlimited. We have also initiated a rigorous review of our operating expenses that we expect will result in annual expense reductions of $2.0-$3.0 million on a prospective basis starting in the third quarter of 2007. Additionally, we have also identified opportunities to streamline various capital projects and content production that we expect will result in a reduction of over $3.0 million in annual cash expenditures. Combined, this restructuring is expected to improve our annual after-tax cash flows by approximately $4.0 million and possibly more."

No one is going take this report well in its entirety, and the stock is seeing the punishment for it.  But it is at least a step in the right direction.  This industry is rapidly changing and changing faster than a mere writeup here can address in a few hundred words.  Jupitermedia’s prior 52-week trading range is $5.45 to $10.48.  At least it owns the Internet.com domain name and is entering new operations with venues such as MediaBistro.com.  Things are bad, but they could have been much worse.

Jon C. Ogg
August 9, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Analysts have been somewhat cautious in general and the average target looks very close to the adjusted current price after today’s gains.  The chart has also been closer to the lower-end of a longer-term trading band, but the pre-earnings gain puts this one in a neutral stance with no clearread either way.  Options are hard to read with today’s gain, but it looks like options traders would be expecting a move of up to $0.45 to $0.50 in either direction.  Sorry the actual internals are hard to read today, but that is what the tea leaves are indicating.  Lastly, NASDAQ has its short interest as 2.318 million shares for July, more than 6-days average volume.

This one will be interesting to report because of some overlaps with recent earnings and recent industry changes.  The Jupierimages unit was the likely reason for the buyout offer from Getty Images (NYSE:GYI).  If you subscribe to our special situation newsletter or if you read some exit updates this week regarding what we thought was going to happen to Getty Images and legacy stock photo businesses, then the run in Jupitermedia today will even be more of a headscratcher.  The good news for Jupiter is that it has other operations and has been trying to keep itself diversified in new media areas (see its last acquisition of MediaBistro.com) that will keep that major stock photo business from being such a key factor in the years ahead.

The balance sheet on this one is not one we normally we would want to give a solid evaluation to because of the large goodwill and intangibles, even if it does own the beloved Internet.com domain.  This 10% rise ahead of the numbers is more than puzzling.

Jon C. Ogg
August 8, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Last week Getty Images posted an earnings and revenues increase, but the company’s lowered guidance (which we expected) is taking a serious toll.  Revenues rose 6% to $218 million and earnings came in at $0.56 on a diluted basis. First Call estimates were $218.8 million revenues and $0.58 EPS.  Getty also announced a restructuring and related reduction in workforce of about 100 employees.  Unfortunately it also trimmed guidance for Q3 and Fiscal 2007.  Cash balances were $288.6 million at June 30, 2007. During the quarter, the company spent a total of $248 million for acquired businesses, of which $120 million was financed through the company’s senior credit facility and the remaining $128 million paid from existing cash balances.  The cash is very important here, at least it will be more important ahead.

We aren’t entirely negative on Getty Images, because even if it faces rough waters it still has a shot of maintaining high profitability if it focuses on what will be its core markets and can fend off fledgling competitors for a while longer.  Getty will likely have a strong place in a few lines of copyright protected material for live events.  With a 15 forward P/E ratio the company doesn’t expensive at all, but they are going to have to fight harder and harder to compete in the same pricing model.  At some point, it wouldn’t even be uncharacteristic for the co-founders Mark Getty and Jonathan Klein to try to mount an MBO.  They didn’t exactly come from nowhere and could probably get financing even in a liquidity crunched world.

The argument that it is really just a value trap for investors is equally or even more overwhelming.  Vast portions of the company’s business will fall prey to mass collaboration, and anyone with about $20,000 can build a similar wiki-model stock photo and copyright video and audio business.  It isn’t that Getty will start losing money, it is that margins could face a perpetual squeeze here.  Once these online digital photo hubs begin to  take a C2C or C2B (yeah, remember those terms?) (now p2p) approach a step further, then there is more trouble for Getty.  The value of digital, audio, and video images is unfortunately not what it was once even 12 or 24 months ago (see article on Jupiter Media deal falling apart).  Not in a world where your business has the easiest model to mass collaborate or Wiki at any rate.  Getty Images is now and will continue to be the true wiki-model victim.  Even though it has made some good acquisitions it cannot acquire everyone.

If you think the $20,000.00 sounds low, an industry contact of a relatively new competitor estimated only a fraction of that.  Augustine Fou, CEO of PictureSandbox.com, stated, "Anyone with $1,000 can build a web 2.0 service — something as simple as a meta search engine for photos which searches across every available microstock collection. Helping the potential buyer more quickly and easily find and license a photo means that purchase will occur outside walls of traditional stock houses."

So, is Getty Images now great value stock, or is it just a major value trap?  We are looking into this now to see if there is a reason to reverse our negative projection.  This stock didn’t really participate in the last major market rally, and this last drop from guidance has made it fare much worse than the broader markets.  For now, we are looking at many other special situation investing situations and going to just call this one a victory for now. 

Download ssin_getty_may_8_2007.pdf
Download ssin_getty_close_aug_2_2007.pdf

Jon C. Ogg
August 6, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.