Vocus Acquires iConnect

On-demand public relations management software provider Vocus Inc. ( VOCS - Analyst Report ) recently announced the acquisition of an email marketing company, iContact for a total consideration of $179.0 million. The total payment was made through a combination of $91.0 million in cash and $9.0 million worth of Vocus common stock and $79.0 million in redeemable convertible preferred stock.

The acquired company, iContact, was founded by Ryan Allis and Aaron Houghton in 2003. iContact’s software has gained significant popularity among different organizations across the globe and approximately 70,000 organizations use this email marketing software.

The future of eMail marketing is great and it has grown to be a billion dollar plus industry, with several companies deploying iContact’s email marketing software to boost their marketing strategy. Email is a quintessential communication tool and it is easier and more price effective for marketers to reach their target audience. Through this acquisition, Vocus is trying to tap the potential in this market.

The idea behind acquiring iContact was to focus more on the Small & Medium Business (SMB) sector. Vocus estimates that spending by SMBs on digital marketing is expected to grow from $5 billion in 2010 to $17 billion in 2015, representing a 25% CAGR.

By 2015, SMBs are expected to allocate 70% of their marketing budget to digital marketing. In addition, e-mail marketing, search marketing and social media marketing will comprise the top three areas of spending for small and midsize businesses by 2013.

By leveraging iContact’s capabilities and growing its sales team, Vocus is targeting cloud opportunities at SMBs.

The inorganic growth strategy was also previously adopted by Vocusthrough the PR Web International acquisition in 2006. The acquisition enables the company to distribute press releases over the Internet that are indexed by major search engines and distributed directly to various news sites, journalists and others.

Vocus reported impressive fourth quarter results, beating the Zacks Consensus Estimate on the bottom line. Vocus operates in a nascent market and should therefore continue to see good growth. On the other hand, we are concerned about the current conservatism with respect to technology spending and the reduction in the Europen business that could partially offset this positive.

Additionally, concerns related to margin contraction linger, based on higher investments in sales and marketing, as well as acquisitions.

Currently, Vocus has a Zacks #4 Rank, which translates into a short-term Sell rating.