Search engine fills IAC Web-site hole
SAN FRANCISCO — Barry Diller ‘s electronic commerce company IAC/InterActiveCorp is buying online search engine Ask Jeeves Inc. for $1.9 billion and taking aim at the Internet’s advertising market leaders.
The deal announced yesterday represents Diller’s bet that he can transform a second-tier search engine into a more formidable threat to industry leaders Google Inc.. Yahoo! Inc. and Microsoft Corp. much like he built the once-irrelevant Fox television network into a major media player in the late 1980s and early 1990s.
The all-stock acquisition also fills a hole in IAC’s diverse lineup of more than 40 Web sites, which include online travel agencies Expedia and Hotels.com, social sites Match.com and Evite.com and other popular services such as Ticketmaster and LendingTree.
“We now have all the clay we need to do whatever we need,” Diller told analysts yesterday.
New York-based IAC is paying 1.2668 of its shares for each of Ask Jeeves’ roughly 69.4 million outstanding shares. The exchange ratio valued the takeover at $1.9 billion, or $27.40 per share, based on yesterday’s stock prices.
IAC’s shares fell 66 cents, or 3 percent, to close at $21.63 in trading yesterday on the Nasdaq stock market, where Ask Jeeves’ shares surged $4.43, or 18.3 percent, to close at $28.67.
Ask Jeeves’ shares have ranged between $21.20 and $44.66 during the past 52 weeks.
Snapping up Oakland, Calif.-based Ask Jeeves gives IAC a foothold in search engine advertising, the Internet’s financial hot spot.
Advertisers have been paying increasingly more to have their Web site links displayed alongside search engine results. The search engines and their business partners receive sales commissions when Web site visitors click on the ad links. The activity is expected to generate $4.7 billion this year, up from $3.8 billion in 2004, according to eMarketer, an Internet research firm.
The ad links displayed at Ask Jeeves’ sites are delivered by Google. Ask Jeeves’ contract with Google runs through 2007 and can’t be broken because of the IAC takeover, Diller said. IAC’s Web sites advertise heavily through Google’s search engine.
Even as they share revenue, Ask Jeeves and Google try to lure traffic from one another. Ask Jeeves wants to process more search requests to generate more moneymaking opportunities, whereas Google wants the traffic to itself so it doesn’t have to split the advertising commission.
IAC’s competitors in the search market will include Microsoft, former Expedia owner, which made its own move into the search business this year by rolling out an internally developed search engine for its MSN Search site, replacing technology it licensed from Yahoo! Inc.
The Redmond company last week announced plans to begin testing its own search-based advertising service, as well.
Despite the increasing competition, Google, based in Mountain View, Calif. has been winning the search battle handily.
Through January, Google’s share of the Internet search market stood at 35.1 percent followed by Yahoo! at 31.8 percent, according to comScore Media Metrix. Ask Jeeves ranked a distant fifth with a market share of 5.1 percent, placing it behind Microsoft’s MSN at 16 percent and Time Warner Inc. ‘s America Online at 9.6 percent.
Ask Jeeves boosted its market share from less than 2 percent last year by paying $395 million to buy a family of Web sites that included Excite.com, iWon.com and Myway .com.
Diller and Ask Jeeves CEO Steve Berkowitz predicted they will be able to grab even more market share by combining forces.
Ask Jeeves’ Web sites attract about 42 million unique visitors monthly, slightly below the 44 million unique visitors at IAC’s sites.
“We believe. IAC will help us realize our full potential,” Berkowitz told analysts yesterday.
American Technology Research analyst Mark Mahaney isn’t sold on the combination. “I’m not sure it’s a good fit unless IAC just wants to bleed money marketing (Jeeves), and I really don’t think they want to do that,” he said.
IAC has ample cash to spend, with $1.16 billion in the bank as of Dec. 31.
Ask Jeeves earned $52.4 million on revenue of $261 million last year, a healthy profit margin that caused some analysts to question whether the company should have sold for a higher price.
“This appears to be a discount,” said Pacific Growth Equities analyst Derek Brown said.
Mahaney said Ask Jeeves might have been able to fetch $30 to $35 per share, or $2.1 billion to $2.4 billion, based on the earnings multiples paid in other recent acquisitions of popular Web sites.
He based his estimates on the multiples paid in The New York Times Co. ‘s $410 million purchase of About.com and Dow Jones & Co.’s $500 million acquisition of MarketWatch Inc. as examples.
Diller said he wanted to pay mostly cash, but Ask Jeeves preferred all stock.
Berkowitz said Ask Jeeves wanted stock so its employees and shareholders have a chance to cash in on the gains IAC expects to realize from the combination. “We see a lot of value in the future.”
Unlike many takeovers, IAC foresees few layoffs in its Ask Jeeves acquisition because the two companies are focused on different parts of the Internet.
Ask Jeeves has about 500 employees.
An entertainment industry veteran, Diller is best known for his bold decision to launch a fourth television network while he was chief executive of Fox Inc.
Starting in 1987, Diller cobbled together the Fox network from a mishmash of small and midsize stations, ignoring the widespread skepticism about his plan.
Within a few years, Fox emerged as a thriving alternative to ABC, NBC and CBS, changing the tenor of network programming along the way.
In recent years, Diller has built IAC into an e-commerce conglomerate that earned $151.8 million on $6.2 billion in revenue last year. The company will split up later this year when Expedia and the other travel sites are spun off.