For TheStreet.com (NASDAQ:TSCM), it's all about addition through subtraction these days. Yesterday, the company announced that it was closing its Independent Research Group subsidiary.
IRG produced $4.5 million in revenue for the company last year, but that income came with $10.3 million in expenses. There seems to be no end in sight to the mounting losses at the institutional research division. Shuttering the subsidiary and laying off its 40 employees stings, but you can't argue with the math.
TheStreet.com's CEO, Thomas J. Clarke, Jr., explained that the subsidiary was not growing fast enough to meet the company's "profitability timetable." He also cited growing regulatory concerns over soft dollars. "Soft dollars" refers to a popular practice in which institutions pay for third-party research with a share of any trades executed based on the research provider's analysis.
That may be true, but the real reason IRG is going away is because it produced a $5.8 million shortfall in its third year. That doesn't look good, especially when you are trying to sell your company.
Yes, earlier this year TheStreet.com announced that it was exploring "strategic alternatives." At the time, the company's timing looked smart. Dow Jones (NYSE:DJ) was set to acquire Marketwatch at a premium back in November and Morningstar (NASDAQ:MORN) pulled off a well-received IPO.
However, just because Marketwatch was scooped up at nearly seven times trailing revenues doesn't mean that TheStreet.com is heading for that same kind of lofty exit strategy. TheStreet.com is currently fetching just twice its annual revenue production. It needs to get its financial house in order if it wants to be priced as something more than a fixer-upper.
That, in all likelihood, is the real reason IRG is going away. It's not just addition through subtraction. When it comes to valuation, it's about multiplication too.
A look back at this story in progress:
- Back in January, TheStreet.com began exploring its strategic alternatives.
- It was a move that was predicted quickly after Dow Jones hooked up with Marketwatch.
- Then again, the soft-dollar controversy was already receding a few months ago.
Longtime Fool contributor Rick Munarriz won't be making a bid on TheStreet.com, though he did enjoy reading James Cramer's Confessions of a Street Addict . He does not own shares in any of the companies mentioned in this story. He is a member of the Rule Breakers analytical team, seeking out tomorrow's great growth stocks today.
