eBay places bid

EBay officially acknowledged rumors this week that it is in talks with Interpark to acquire its roughly 37% stake in Korean auction competitor Gmarket. Gmarket shares rallied 15% on the news. Should this transaction go through, we believe eBay would quickly hit the ‘buy it now’ button for Gmarket to establish control of the Korean auction market.

Amid a slowing U.S. auction business, eBay has been relying on its international operations for growth. For its recent second quarter ended June 30, eBay’s international revenue accounted for about 54% of total revenue. International revenue grew close to 30% year over year, while US revenue was up just 12%. Most of the international success, however, stemmed from eBay’s European operations, with German and UK operations accounting for more than half of international revenue.

Interpark announced that it was shopping its shares earlier this year, putting a $1.4bn price tag on Gmarket. This is a 15% premium over Gmarket’s current market cap of $1.23bn, and means eBay would have to shell out slightly more than $500m for the shares. That works out to 5.5x Gmarket’s trailing twelve-month (TTM) revenue of $254.34m and 31.4x TTM EBITDA of $44.56m. That’s a premium compared to eBay’s own valuation of 4x TTM revenue and 24x TTM EBITDA.

By acquiring Gmarket, eBay would get a company that understands the local market. Its failure to adapt to economic and cultural realities burned eBay with its first attempt to crack the Korean market. Former CEO Meg Whitman simply applied a template that had worked in the West and put the operation on cruise control. It seems that new CEO John Donahoe has learned from that mistake. Rather than continue the failed strategy of going it alone, we expect Donahoe to try to succeed in Asia through joint ventures and acquisitions of local competitors. Given the huge potential upside for further international growth by capturing that elusive Asian market share, this deal is likely the first of many.

Significant eBay acquisitions, 2005 – present

Date Target Deal value
January 28, 2008 Fraud Sciences $169m
May 30, 2007 StumbleUpon $75m
January 10, 2007 StubHub $310m
April 24, 2006 Tradera AB $48m
October 10, 2005 Verisign (payment gateway business) $370m
September 12, 2005 Skype $2.57bn
June 1, 2005 Shopping.com $678m

Source: The 451 M&A KnowledgeBase

‘Cuil-ing’ off Google

In the lucrative world of search, not much has changed in recent years. Google is still running away with market share, handling an estimated two-thirds of all queries, followed – at a distance – by Yahoo and Microsoft. However, some changes may be coming, with a host of new search startups coming out of beta. The latest: Cuil. The highly touted and heavily funded startup created by some high-ranking former Google search employees hopes to dethrone Google. Do we believe it can accomplish that? Of course not; in fact, due to a less-than-stellar launch, it may have already lost.

Still, there is a small opening for Cuil and the other startups. Google has been mired in controversy for the past year over privacy concerns and regulatory hurdles, not to mention its ambitions to become a software application vendor. Those distractions at Google have encouraged venture capitalists, particular the more adventurous angels, to once again put money into search. Cuil has collected about $30m, while Blekko has received $6m. (The funding at Blekko comes despite the fact that the company, as it stands now, is nothing more than a promising idea from industry veterans and an empty webpage.)

Of course, the reason this new generation of search companies is getting VC attention is that there are natural acquirers for this technology. One example: Microsoft’s purchase of Powerset earlier this month for an estimated $100m. While that valuation may seem a bit low for Powerset, which was once as hotly hyped as Cuil, keep in mind that the price was essentially twice its post-money valuation in its latest round. Not great, but not bad in this market.

We suspect other search startups will ultimately sell for much the same reason that Powerset sold: scaling up these startups to deal with millions of users, and competing with multimillion-dollar R&D budgets of the ‘Big Search’ companies is not an easy or cheap task. With a proven willingness and desire of Yahoo, Microsoft and Google to make defensive or technology acquisitions in search, we believe the end game for Cuil, Mahalo, Blekko and the like will all be the same: acquisition. The bigger picture in the Cuil saga is that there is a batch of ex-Googlers up for grabs – Googlers who helped define the core technology of early Google search technology. Though Google is rumored to already be in engaged in talks with the company, how could Microsoft and Yahoo possibly resist swooping in for the coup?

Startup search engines

Company Year founded Funding
Cuil 2007 $30m
Mahalo 2007 $20m
Blekko 2006 $6m
ChaCha 2006 $16m
Hakia 2004 $21m

Source: Company reports

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.

Will Yahoo shareholders be Amp’ed?

Now that Yahoo has passed on Microsoft’s bid, it’s up to Jerry Yang to show the company’s testy shareholders that soldiering on makes more sense than selling out. That’s going to be a tough job. A handful of shareholders have already sued the Internet company over its decision not to talk with Microsoft, and the disenchantment is likely to spread if the stock returns to the level it was before the unsolicited bid came in. (A quick fact: From the time Yang retook control of Yahoo last June through the day before Microsoft unveiled its bid, Yahoo stock lost nearly one-third of its value on his watch.)

So how is Yahoo going to get its shareholders back above water? One key to the plan is the ‘buy and build’ initiative it has started with AMP. Yahoo’s new online advertising management platform is built on a pair of deals that cost the company nearly $1bn in 2007. A year ago, Yahoo spent $680m to pick up online ad exchange network Right Media Inc, and then followed that up last September with a $300m play for behavior-based marketing vendor BlueLithium.

AMP is slated to come out in the third quarter of this year, although a few publishers are currently test-driving it. The stakes for Yahoo are huge. By its own assessment, the US online ad market will hit $50bn in four years. Securing a chunk of that ad spending will go some distance in silencing shareholder grousing about Yang & Co’s decision to stiff-arm Microsoft. Of course, that’s only if AMP delivers and doesn’t become another Panama-style disappointment at Yahoo. If that turns out to be the case, Yang would be lucky to find a buyer for his company, even at a discount. 

Yahoo’s recent display ad networking deals

Announced Target Deal value
Sept. 4, 2007 BlueLithium $300m
April 30, 2007 Right Media $680m

Source: The 451 M&A KnowledgeBase

Crisis averted

After three months of nonsense, Ballmer’s folly is over. Microsoft’s CEO said over the weekend he will not pursue Yahoo, a move that shareholders applauded right from the opening bell on Monday. (Microsoft stock never traded below Friday’s close, while shares of Yahoo, which had been abandoned to trade on the company’s fundamentals, were slashed 15% in early Monday afternoon trading.) In our view, the ‘relief rally’ in Microsoft stock solidifies our view that the company was wrong-headed — both in decision and execution — to go after Yahoo.

We need only look back in Microsoft’s own M&A history to see how unlikely it was to get the kind of returns it was hoping from Yahoo. In early part of this decade, Microsoft inked a pair of deals for business software companies that was supposed to narrow the gap to the long-dominant vendors. In quick order, Microsoft shelled out a combined $2.4bn for Great Plains Software and Navision Software and set about knocking off SAP and Oracle. Executives talked about Microsoft’s division, which sold ERP and CRM software, growing into a $10bn business. That hasn’t happened – not even close. More than a half-decade later, it barely scratches out $1bn in annual sales and increasingly appears technologically and competitively irrelevant. The acquisitions did nothing to make up ground on SAP or Oracle, much less the new breed of rivals including Salesforce.com and SugarCRM. (We recently made the case that Microsoft should divest this unit, called Dynamics.)
Adding Yahoo to Microsoft’s online division would have simply repeated the mistakes of Dynamics. The protracted and messy acquisition of Yahoo would not have gotten Microsoft any closer to knocking off Google from its top spot in online search advertising. To their credit, the folks in Redmond, Wash. saw the past as prelude. And if the cautionary tale served up by Dynamics was a little too close to home, Ballmer could always pick up the phone and call Jerry Levin to ask how Time Warner’s ‘transformative’ $185bn purchase of AOL worked out. Of course, Ballmer tabling the Yahoo bid does leave one question unanswered: Which transaction destroys more shareholder value? Trying to graft a sprawling Internet property onto a media company or trying to graft a sprawling Internet property onto a software company? Even though Ballmer left the door open for a future bid for Yahoo, his shareholders have already indicated they don’t want to pay to find out the answer to that question.    

Short and sour

Date Event Yahoo stock price
Feb. 1, 2008 Microsoft unveils $31 per share unsolicited offer for Yahoo $28.38 (up 48%)
May 5, 2008 Microsoft pulls offer $24.24 in afternoon trading (down 16%)