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Why Second-Tier Sites May Be Worth Top Dollar


With online advertising the biggest thing since the 30-second TV spot, it's easy to see why Web sites with strong ad revenues are tempting takeover targets. The latest deal happened on Mar. 21, when IAC/InterActiveCorp (IACI) announced it will buy search site Ask Jeeves Inc. (ASKJ) The Jeeves deal followed New York Times Co.'s (NYT) acquisition of Primedia Inc.'s (PRM) About.com, which closed on Mar. 18, as well as Dow Jones & Co.'s (DJ) purchase earlier this year of investing site MarketWatch Inc.

IAC'S offer of $1.9 billion in stock for a search business that ranks a distant fifth worldwide raises the question: Are these second-tier companies worth all this loot? The answer is a qualified yes. While About.com commanded 23 times this year's expected cash flow, and Jeeves went for about 20 times this year's expected profits, analysts point to strong growth in the online ad market as justification for the lofty tabs. Indeed, the Interactive Advertising Bureau expects Web ad revenue to rise 20%, to $11.5 billion, this year.

As a result analysts predict more acquisitions. "People are looking for exposure to search advertising," says Mark Mahaney, an analyst at American Technology Research Inc. in San Francisco. "There are only so many names out there."

Among them: Shopping.com (SHOP), ValueClick (VCLK), InfoSpace (INSP), and FindWhat.com (FWHT). As the leading price-comparison site, Shopping.com is considered a prime target, thanks to expected annual earnings growth of 27% for the next five years. InfoSpace is positioned to ride two trends: Web advertising and wireless services, especially games delivered to cell phones. ValueClick, an online advertising agency, represents a broad play in Web advertising. FindWhat.com, a relative minnow in search, could be gobbled up by a Google (GOOG) or Yahoo! Inc. (YHOO) as consolidation gathers momentum.

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Rapidly rising online advertising rates, especially for search, are driving up the strongest players' revenues and profits -- a key reason to buy one. Jeff Lanctot, a vice-president at Seattle-based Avenue A/Razorfish (AQNT), the largest buyer of search ads in the U.S., says rates rose an average of 25% to 30% last year.

What's more, with lots of money pouring into energy and other cyclical stocks, ad-driven Web companies have become relative bargains. Shopping.com, at about $18 a share, is off nearly 50% since October. InfoSpace Inc. is down nearly $20, to $39, since last fall. And ValueClick Inc. and FindWhat.com Inc., respectively $11 and $10, are trading at price-to-earnings multiples level with or below expected profit growth -- typically a sign of cheap stocks.

What will it take to spark the next round of dealmaking? Buyers will want to pay today's stock prices, as IAC Chief Executive Barry Diller did to lock down Ask Jeeves, which, at $28 a share, is off $16 since last year. But sellers may want to avoid the criticism Ask Jeeves CEO Steve Berkowitz took for selling at what some investors see as a cheap price. The bottom line: Speculators could get burned betting on mergers, but investors counting on long-term earnings growth could get some nice buyout surprises along the way.

By Timothy J. Mullaney in New York


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