By Sarah Lacy It's not Barry Diller's fault that he's late to the Internet search game. His company, IAC/InterActiveCorp. (IACI), tried buying 60% of search site Lycos near the peak of the Internet boom in 1999 for $4 billion -- a deal Lycos investors thought was too cheap. Lycos sold to Terra Networks for $12.5 billion a year later.
On Mar. 21 the media mogul announced a much cheaper -- and savvier -- move. Pending shareholder approval, IAC will purchase fifth-ranked search company Ask Jeeves (ASKJ) for $1.85 billion in stock. If Diller & Co. play their cards right, the Ask Jeeves acquisition could make IAC the company to beat in the nascent but growing market for local Net searches.
The companies expect the deal to be completed within the next two quarters. On Mar. 21, IAC's shares closed down almost 3%, to $21.63, on the news, while Ask Jeeves was up nearly 5% to $28.67 (see BW Online, 3/22/05, "S&P Upgrades IAC/InterActive").
OTHER SUITORS? The Ask Jeeves acquisition is not only a bargain compared to the Lycos offer but also when compared to recent Internet acquisitions. New York Times (NYT) recently paid 23 times earnings for About.com, and Dow Jones & Co. (DJ) paid 19 times earnings for CBS MarketWatch. Both make IAC's 16.5 times earnings offer for Ask Jeeves look downright miserly -- especially considering IAC's position in a market expected to grow 25% a year over the next five years.
The low price even gave some analysts like Youssef Squali of Jeffries & Co. reason to believe new suitors were likely to make competitive offers before the deal can close.
So what would Diller want with Ask Jeeves? The biggest opportunity may be in becoming the player to beat in the emerging local search market -- a claim not even the mighty Google (GOOG) can make. Local search has the potential to reach a whole new market of advertisers (see BW Online, 3/22/05, "Search, the Next Generation").
LOCAL MUSCLE. Currently, small businesses selling online to a national audience love sites like Google or Yahoo! (YHOO). But many more small businesses, say a house painter in Des Moines, want to target only a local market. It's a market Google, Yahoo, and others are all salivating over, but not one that any single company dominates.
Many IAC sites are already doing local search within niches. Citysearch helps people find restaurants and entertainment reviews for different cities, while Match.com helps people find other singles. Evite aids people in organizing local events through online invitations. Although any search engine could point to Citysearch's restaurant reviews, they'll be more accessible to Ask Jeeves as part of the same company.
Ask Jeeves is a strategic addition to a growing online empire that includes IAC's other well-known sites, among them Ticketmaster.com and Expedia. Those sites represent real opportunities to boost Ask Jeeves' reach while giving it an e-commerce edge against Yahoo, Google, and MSN (MSFT) -- the three top players it has no hope of competing with on its own.
BUY THIS GIFT. However, investors hoping to see IAC use Ask Jeeves to tie together all of its varied Web properties into a portal like Yahoo shouldn't hold their breath. Diller & Co. still plan on spinning off Expedia and other travel-related sites into a separate company once this deal is done. And Ask Jeeves CEO Steve Berkowitz has assurances the company will remain a separate business unit, headquartered in Oakland.
But IAC can still capitalize on those proverbial synergies, even without a Yahoo-like strategy. Such strategies will likely follow the pattern of Gifts.com, an e-commerce site IAC opened on Mar. 21 that has been overshadowed by the Ask Jeeves news. It's one of the first sites the acquisitive company has ever built from scratch.
Gifts.com will give advice to frustrated gift givers based on personality profiles of the people for whom they are shopping. Chief Cxecutive William Lynch says deals are already in place to promote the site on the other IAC brands, as well as market Ticketmaster concerts and, eventually, Expedia weekend-getaway packages as good gift ideas. Gifts.com tie-ins are also on tap with Evite, where friends plan birthday parties and other events.
MORE R&D. Ask Jeeves' search capabilities will dovetail with other IAC Net properties in other ways as well. To start, IAC can add an Ask Jeeves search box on each of its more than 30 sites. Currently, IAC sites garner about 44.2 million unique visitors per month, vs. Ask Jeeves' 42.1 million. Plus, there's not a lot of overlap between Ask Jeeves visitors and IAC customers, according to comScore Media Metrix.
For Ask Jeeves, IAC brings much more to the table than the 17% premium over its current stock price. As a stand-alone public company, Ask Jeeves has always been the little guy, forced to focus too much on profitability to make heavy R&D and marketing investments, analysts say.
Considering its resources, Ask Jeeves has impressed with its ability to compete on the technology front with the likes of Google and Yahoo, says Charlene Yi, principal analyst at Forrester Research. Now industry watchers will get to see what Ask Jeeves management and engineers can do with resources that match their rivals in both technology and marketing.
PROMISE AND PERIL. Of course, all of this depends on integration, something that hasn't always been IAC's strong point, says Safa Rashtchy, senior research analyst at Piper Jaffray. Moreover, both Gifts.com and Ask Jeeves are departures from IAC's pattern of buying startups that have already clawed their way to the top of their markets.
The heart of this deal is making the sum add up to more than its parts. That could make Ask Jeeves IAC's diciest -- yet potentially most lucrative -- deal yet. Lacy is a reporter for BusinessWeek Online in the Silicon Valley bureau