Category: online advertising

Uptake in travel deals

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-by Thomas Rasmussen

The past year has seen a surge in online travel deals as well as venture funding of travel startups. In fact, we wonder if the industry hasn’t gotten a little too crowded. A number of startups have received funding, including Uptake, which was founded by ex-Yahoo Travel execs. Uptake brings the social aspect to the online travel world by aggregating user-generated reviews from various portals. It fetched $10m in venture funding from Trinity Ventures and Shasta Ventures last week, bringing its total raised to $14m. The company says the funds are to be used for internal expansion and acquisitions. Indeed, the current competitive landscape has presented startups like Uptake as well as established players like Expedia with one choice: grow or risk becoming irrelevant.

Against this backdrop, online travel companies have taken different approaches to M&A. Relative newcomer Kayak.com is one company that recently took a major step to buy growth. Hoping to go public eventually, the company doubled its size overnight by acquiring competitor SideStep Inc for an estimated $180m in December. Meanwhile, fellow startup Farecast worked on the other side of a transaction, opting for a sale to Microsoft in April for an estimated $115m to help Redmond shore up its ailing MSN Travel division. Meanwhile, the giant of the industry, Expedia, has been ratcheting up the M&A pace. Of the 15 acquisitions it has done, 11 were inked in the last 18 months. In a recent filing with the US Securities and Exchange Commission, Expedia said it spent $180m on five acquisitions in the first two quarters alone.

As for Uptake, we expect the small company to consider a few tuck-in acquisitions of smaller rivals to add more voices to its reviews. Potential targets include companies such as TravelMuse and TripSay, which also offer user reviews. However, while Uptake is eyeing targets, we have a feeling it may be a target itself. We suspect the social aggregation aspect of Uptake is very appealing to larger players that are trying to bring the social Web 2.0 experience to online travel. Likely acquirers include Kayak and Microsoft, which both lack a social rating system. Expedia and Yahoo Travel, an outfit Uptake’s founders know well, might also want the technology to improve on their own systems.

Number of known strategic online travel deals

Period Deal volume
September 2007-2008 14
September 2006-2007 11
September 2005-2006 6
September 2002-2005 19

Source: The 451 M&A KnowledgeBase

Red-zone M&A

So-called ‘New Europe’ is emerging as an important Web 2.0 market. Revenue growth is steady in the mid- to high-double digits compared to low-double digits for the established US web portals. That hasn’t gone unnoticed by global companies scrambling to tap into these faster-growing markets. The latest example is the rumored sale of leading Czech Republic search engine and web portal Seznam. Goldman Sachs has reportedly been tapped to head the sale. Google, Microsoft and private equity shop Warburg Pincus are said to all be serious contenders, according to the Czech media.

Seznam is closely held. Founder Ivo Lukacovic owns just over two-thirds of the company, with the rest held by investment firms Tiger Holding Four and Miura International. The 450-employee portal says it took in about $55m last year, up from about $30m the year before. Revenue is expected to reach $80m for the year. Seznam is reportedly being shopped around at a valuation of $900m. At a multiple of 11 times sales, that is a premium compared to a similar deal inked by Warburg Pincus last year. The buyout firm acquired Seznam competitor NetCentrum for $150m at a multiple of 6.5 times revenue. Nonetheless, compared to recent US Web 2.0 deals, the rumored valuation of Seznam is in line with, or at a discount to, market prices.

If a deal for Seznam gets done, the purchase will stand as one of the largest Internet deals ever inked in the former Soviet block. And as the Eastern European Internet market continues to grow, we believe so will the M&A activity from anxious companies trying to make an early land grab. Meanwhile, other search engines may look to go it alone. Yandex, a leading Russian portal, has reportedly been preparing for a US public offering for some time now, but an almost nonexistent IPO market may lead it to consider a sale, instead. We’re fairly certain that Google and Microsoft stand ready to provide the liquidity for either (or both) of these companies if the public markets can not.

Recent transatlantic search M&A

Date Acquirer Target Deal value TTM Revenues
July 18, 2008 Google ZAO Begun (Russia) $140m Not disclosed
May 26, 2008 Google 265.com (China) Not disclosed Not disclosed
January 8, 2008 Microsoft Fast Search & Transfer (Norway) $1.24bn $167.75m
December 4, 2007 Warburg Pincus NetCentrum (Czech Republic) $155m (reported) $24m (reported)

Source: The 451 M&A KnowledgeBase

Steady flow of online video deals

Emerging online video markets have been keeping investors and acquirers busy, with Google making the latest move through its recent purchase of tiny startup Omnisio. The California-based startup, which received seed funding from Y Combinator, launched in March and offers an online video editing widget that enables users to slice and mash existing online videos, add text and audio commentary and create proprietary slideshow presentations. Google plans to integrate Omnisio’s technology and its three Australian ex-pat founders into its YouTube platform.

In the past two years, companies have spent more than $7bn on more than 50 deals in the (broadly defined) online video space. The largest of these was Google’s purchase of YouTube for $1.65bn in October 2006. Rival Yahoo has also been active. It picked up video sharing site Jumpcut two years ago, as well spending $160m for video distribution platform Maven Networks earlier this year and a total bill of nearly $1bn for related advertising networks BlueLithium and Right Media in 2007.

Meanwhile, traditional media bigwigs are also banking on online video and advertising markets. In March, News Corp and NBC launched their $100m joint TV venture, Hulu, just month after picking up Chinese startup Mojiti, which serves as the TV streaming platform for Hulu. Although professional video streaming services such as Hulu are expected to be able to secure ad dollars quicker than user-generated video sites, it’s still early in that market.

One market where we see tremendous opportunity is for ad-based mobile services. Consider nine-year-old MobiTV, which has been streaming to mobile devices since 2003. Operating on a subscription-based revenue model, MobiTV claims profitability. Last year, the company received $100m in its latest round of VC funding, and is actively looking to use that cash to buy its own advertising network. In this crowded and bustling marketplace, the top Internet and media behemoths would do well to pay attention to well-footed upstarts like MobiTV.

Selected online video deals

Date announced Acquirer Target Deal value
July 30, 2008 Google Omnisio $15m (reported)
Feb. 12, 2008 Yahoo Maven Networks $160m
Sept. 12, 2007 Hulu Mojiti not disclosed
Oct. 9, 2006 Google YouTube $1.65bn
June 27, 2006 Yahoo Jumpcut not disclosed

Paid for potential

Expanding its operations into US markets, UK media giant Guardian News & Media – publisher of The Observer and The Guardian – picked up B2B blog network ContentNext Media earlier this month. Founded in 2002, ContentNext is the creation of ex-Silicon Alley Reporter managing editor and business journalist Rafat Ali. Its ad-supported online network includes the content-centric blog paidContent.org, mocoNews.net, ContentSutra.com and the UK version of paidContent.

We understand that ContentNext, which now employs 23 people, sold for around $30m, and we estimate the company was running at $4m in trailing revenue. For financial advice, ContentNext tapped Mark Patricof, managing director at MESA (Media & Entertainment Strategy Advisors), marking MESA’s third M&A advisory in online media this year. To date, ContentNext has kept its finances in the family. In 2006, the blog network raised its first and only round of financing, for less than $1m. Interestingly, its first and only investor also happens to be private equity patriarch Alan Patricof through his VC outfit Greycroft Partners.

Still, a 7.5x trailing revenue multiple had us scratching our heads at first, especially considering that the content network fetches only one million page views per month. But, looking closer, we see the deal being more about future potential and figure that an additional earnout is likely. In addition to a larger geographic reach for both publications (ContentNext will continue to operate independently), potential revenue from conferences also drove the deal. Further, ContentNext was not out shopping itself, but looking for a second round of funding, and we understand the deal was very ‘friends and family’ in nature. Judging from laudatory comments Rafat Ali and Simon Waldman, director of digital publishing, make about each other online, this certainly seems to be the case.

Assembling the deliverable

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Comcast’s digital content delivery software subsidiary ThePlatform made its first acquisition this week, picking up tiny social networking startup Chirp Interactive. Founded just one year ago, the San Francisco-based company has developed an interactive screen saver that collects updates from websites like Facebook and Flickr. Structured as an asset acquisition, ThePlatform will use the VC-backed company’s technology and select employees to build similar social features into its own content distribution and management system.

Comcast bought ThePlatform in 2006, early in its efforts to build a viable online video distribution business, and operates the business as an independent entity. Since 2006, it’s been reported that the cable giant has shelled out nearly half a billion dollars on five online deals since the beginning of 2006, including its purchases of movie review and ticketing website Fandango in April 2007 and social networking site Plaxo in May 2008. Comcast’s VC arm, Comcast Interactive Capital, has also been banking heavily on online startup. One recipient of Comcast’s capital is tiny video and advertising distribution company Revver, which incidentally was picked up by LiveUniverse in February.

Going forward, we ask where Comcast and its VC arm will be setting their sights. Well, mobile content distribution, of course. In fact, Comcast participated in a $12.6m seed-round funding of Boston-based mobile WiMax startup Cartiza earlier this month. It also joined Google, Time Warner and other industry behemoths in a $3.2bn round in WiMax company Clearwire in April. After building up a healthy reserve of content, a video and advertising distribution platform and increasing social networking capabilities, the need to converge these platforms on mobile devices is clear, and Comcast is making the moves to do just this.

Selected Comcast acquisitions

Date announced Target Target description Deal value
May 14, 2008 Plaxo Online address book synchronization $160m*
April 11, 2007 Fandango Online movie tickets & reviews $192m*
June 28, 2006 ThePlatform Digital media publishing & delivery $90m*

Source: The 451 M&A KnowledgeBase *Reported values

Should Ask prepare to get Answers?

Ask.com – a subsidiary of IAC/InterActiveCorp – closed its acquisition of Lexico Publishing Group last week. The 16-person company, which includes Dictionary.com, Reference.com and Thesaurus.com, reportedly went for $100m in cash, representing a multiple that we estimate at 10 times its trailing twelve-months revenue, or more than $6 per monthly unique visitor. This acquisition comes after a tumultuous ride for the profitable Lexico. The company was almost acquired by Answers Corp (Answers.com) in 2007, but after Answers failed to drum up proper financing, the deal turned sour. It was officially terminated in February, presenting an opening for Ask.com to swoop in. Besides being a happy ending for Lexico, which has been chasing an exit for a while, this fits well with Ask.com’s restructuring strategy of returning to its roots as an answer facilitator after its short but decidedly failed attempt to out-Google Google in the search engine department. Ask.com has openly said that more acquisitions are forthcoming. So who might the company buy next?

Among others, we see Answers.com itself as a potential acquisition target. Despite a growing base of about 20 million loyal users, the provider has had a tough time monetizing its page views and has been bleeding cash for more than a year now. Incorporating Answers.com’s user base and content could solidify Ask.com as the leader in the answer-search business. And with Amazon and Yahoo moving in on Ask.com’s turf, it is necessary for the company to continue to grow its market share. Indeed, we’ve heard industry rumors that Ask.com had made overtures to its rival well before the failed Lexico deal. And interestingly, Redpoint Ventures recently pumped $6m (with an option for another $7m) into Answers.com. That is the same Redpoint Ventures that helped fund Ask.com during its early days and that still has a stake in the IAC division. Ask.com’s former CEO Jim Lanzone also happens to be an entrepreneur-in-residence at Redpoint.

Surely the struggling company could be had for much less than the revenue multiple accorded to Lexico, which reported a healthy EBITDA of about $3m for calendar 2006, the last data made public. While the revenue multiple and price-per-user metrics of the Lexico deal would suggest a $100m-plus valuation for Answers, the company, which reported an operating loss of about $3.7m in the first quarter of this year, is clearly going to be valued at a steep discount. It’s currently trading at a 52-week low, with a market cap of just above $23m, or just a bit more than two times trailing revenue and a little over a dollar per user. With more than three times the number of employees as Lexico, Answers clearly has a much more labor-intensive model than its peer. That may change, though. Answers.com’s fast-growing new WikiAnswers.com service offers a lower-cost community-based answer site and is expected to exceed the more labor-intensive Answers.com service in revenue by the second half of 2008.

At a minimum, we estimate that Ask.com would have to shell out somewhere in the neighborhood of $30m, or roughly $3.80 per share, for the company – a 30% premium to the current price. It’s certainly not a question of whether IAC can afford the deal – it currently has a little more than $1.2bn in cash and a market cap of $4.7bn – but how much it could leverage the deal by cutting costs, monetizing the user base and expanding the WikiAnswers business. Indeed, for Answers.com, an acquisition by Ask.com may be just what the company and its desperate shareholders have been looking for.

On a final note, Ask.com’s new strategy of no longer trying to beat Google at its own game is in stark contrast to that of Microsoft, whose recent investments and acquisitions put it on a head-on collision course with Google. However, Microsoft’s recent acquisition of Powerset at least gives it technology that is capable (within Wikipedia, at least – it is yet to be tested publicly on a large corpus) of providing answers to both questions and keyword queries and could end up being a major challenge to the Q&A format Ask.com favors. That is, of course, if it doesn’t get lost in the mix if Microsoft should buy Yahoo’s search business.

Tapping online TV ad revenues

After running up an M&A bill of more than $10bn on advertising deals last year, Internet titans are now taking the wraps off some of the platforms built on those acquisitions. This week, for instance, Google struck a content distribution deal with Family Guy founder Seth MacFarlane. Google will distribute a new Internet-exclusive cartoon series using the AdSense platform it picked up through its $280m acquisition of Applied Semantics back in 2003. Additionally, Google launched its Google Affiliate Network, which is essentially a re-branding of DoubleClick’s affiliate marketing product, Performics.

Through the AdSense deal, Google will syndicate two-minute ‘webisodes’ with accompanying advertisements to thousands of demographically chosen websites. Of course, other sites already offer Web video streaming. However, few of them have found a way to offer the content in a profitable way. Consider the online TV network Hulu, a $100m joint venture of NBC and News Corp that streams videos from its stand-alone website. Although it consistently sells out its ad inventories, Hulu still struggles to get viewers to its site, much less run profitably.

One boost to the flagging revenue outlook for this market may well come from online video advertising markets, particularly mobile video markets. While the top players, including Google, keep busy monetizing on previous acquisitions, we expect the scores of smaller players to get snapped up. Among those that might find themselves on a shopping list: VC-backed Qik, which streams live TV and video to mobile phones and enables users to upload content to social networking websites; a similar startup, Myframe’s Flixwagon, which has partnered with MTV Israel; and finally, decentral.tv’s Kyte.tv, based in San Francisco, is streaming video on the iPhone. If any of the big online advertising platforms want to go wireless, we expect they will probably take a close look at one or more of these startups.

Selected Google online advertising deals

Date announced Target Deal value Company description
April 13, 2007 DoubleClick $3.1bn Online advertising and marketing services
April 23, 2003 Applied Semantics $281m Online advertising and analytics platform

Source: The 451 M&A KnowledgeBase

Microsoft makes meaningful buy

Since shelling out nearly $10bn in a year and a half to reinvent itself as an online contender, Microsoft, on July 1, confirmed reports of its purchase of online search and natural language vendor Powerset. Microsoft aims to add Powerset’s Web search linguists, engineers and technology to its Live Search division. On the heels of its $1.2bn purchase of enterprise text analytics giant FAST Search and Transfer in January, Microsoft inked this much smaller deal to enhance its consumer Web search.

Founded in 2006, Powerset released its Web search technology earlier this year. In partnership with Xerox’s PARC (Palo Alto Research Center), the San Francisco startup, which has raised some $12.5m in funding, has been developing search software that reads online text and discerns semantics as well syntax. So far, Powerset’s semantic technology has been publicly tested only on Wikipedia and fellow open source encyclopedia Freebase, both of which have a solid structure that Powerset leverages. The company has also been in talks with major publishing companies about an ad-supported service it has in the works.

With Powerset having been sold to an established technology company to realize its plans, we wonder what that will mean for the rest of the semantic technology companies. Currently, the poster child of the market is Radar Networks, which is backed by $18m in VC. It is developing a semantic social networking application, Twine, which is still in private beta and due to be released this fall. There’s also New York-based semantic search engine Hakia, also in private beta, which has landed over $20m in funding. However, if Powerset, which was often referred to as ‘the next Google,’ got picked up for just $100m (as the rumors have it), then what’s the exit picture for the two remaining rivals, both of which have raised more money than Powerset? Maybe we need to Google the answer.

Selected Microsoft search acquisitions

Date announced Target Deal value Target description
July 1, 2008 Powerset $100m (reported) Semantic Web search engine
January 8, 2008 Fast Search and Transfer $1.2bn Enterprise search software

Source: The 451 M&A KnowledgeBase

Blank printing presses

Brenon Daly

Gutted by the arrival of Internet, newspaper companies have nonetheless printed very few transactions that could help them survive in the Media 2.0 era. One reason for the blank M&A pages: The currencies available to them are disappearing, according to Tim Connors, a partner at U.S. Venture Partners. Speaking on a panel at the recent IBF VC Investing Conference in San Francisco, Connors said the virtually uninterrupted slide in shares of many media company have taken a few would-be acquirers out of the market.

Indeed, we can only imagine it’s probably inconceivable for any of the newspaper companies to be shopping, at least not for an equity deal. Regional newspaper company McGannett shares are currently trading at their lowest level ever; USA Today-owner Gannett stock has sunk to a 14-year low and shares in the venerable New York Times are changing hands at levels not seen since mid-1996.

At the IBF conference, Connors noted USVP recently had an exit to an old media company. Portfolio company Adify, which runs advertising networks for some 120 vertically focused Web sites, got snapped up by Cox Enterprises for $300m. (Adify was in the midst of raising a third round of funding when Cox took them out. JP Morgan banked the deal after one of their analysts initially suggesting the two companies might strike a commercial relationship.) Incidentally, Cox paid its $300m bill for Adify in cash.