Content Matters

Start with two billion?

OK, that's a variation of the old Napa Valley joke about the best way to make $10 million in the wine business (start with $20 million) but if the shoe fits...

Reading today's New York Times article about how recent acquirers of newspaper businesses are shocked at their rapidly deteriorating performance.  Shocked?

Anyone who has followed the newspaper industry the past few years is aware that the current fundamentals of the business are on a rapid descent and there's no obvious way to resolve them. The classified business has been eaten by Craigslist, free regional dailies have taken some of the display advertising and Google, Yahoo and Microsoft all have their eye on local advertising.  All it takes is casual reading of this blog or Ken Doctor's Content Bridges to understand that story.

The newspaper business has always been largely about ego and power. The difference then was that magnates like Hearst could use the newspaper as a way to boost their ego and their wallet.  Going forward, newspaper ownership will have to be all about ego, as it's pretty clear that the investment returns demanded by financial investors like Sam Zell or private equity firms just won't be there.

SAS Institute this week announced the acquisition of Teragram Corporation, a provider of text mining and NLP products.

Slowly but surely, all the BI companies are buying into the text mining market. Business Objects bought Inxight, SPSS bought LexiQuest and later bundled it into their Clementine data mining app.   SAS had entered the text mining market a few years ago with the launch of their home-grown SAS Text Miner.  Teragram has been a niche player in what remains a niche space, despite vendor efforts to make it a mainstream app.

To-date, none of the business intelligence software companies have shown the ability to closely integrate these unstructured data technologies with their structured data solutions. Part of the challenge for most has been that text analytics software does not provide neat answers the way that their BI dashboards do. It will be interesting to see if the SAS user base, who are accustomed to data mining, are quicker to acclimate to text mining.

While the press release quotes Teragram CEO Yves Schabes stating "Teragram and its technology fit perfectly into SAS' analytics and text mining efforts, as SAS continues to innovate in this rapidly growing market", it's interesting to note that they do not mention any joint customers of the two products. I'm skeptical about how close a fit this really will be.

Felix Salmon at Portfolio.com has further thoughts on the BreakingViews piece that I posted on yesterday.

Felix takes a less ..umm.. nuanced approach than I did, though we come to the same conclusion.  He opens his post with:

Breakingviews, one of the least web-savvy websites in the world, ran a column by Jeff Segal on Monday about blog valuations.

Ouch.

But, the post deserved such treatment.  Felix references some of the same obvious examples that I had referenced, such as Jason Calacanis' sale of Weblogs, Inc. to AOL to refute the basic premise that blogs aren't viable M&A candidates for media companies. It's hard to imagine that the BreakingViews writer was unaware of those deals.

A key point in Felix' post is the fact that unlike the zero sum game of traditional media properties, in blogs, intelligent competition can lift all boats:

I want other finance blogs to launch, the more the better. And I want them to be written by keener minds than mine. The more that happens, the more traffic I'll get - that's the way the conversation works. Other media don't work like that: if I'm watching ABC, I'm not watching NBC. But blogs are different, and don't operate according to that kind of zero-sum mathematics.

Looking at properties like TechCrunch, PaidContent and even Alacra's own Research Recap, it's pretty evident that the blogging platform is a great platform to launch media properties.  And once those properties develop an audience they are just as attractive (probably more attractive when you figure in cost structure) than the traditional forms of media.

Blog syndication platform Pluck has been acquired by Demand Media, a domain name acquisition company led by Richard Rosenblatt, former MySpace chairman.

Pluck is best known for its Blogburst syndication network, which syndicates blogs out to mainstream media outlets such as Reuters, USA Today, Rodale, Washington Post and others. Reuters was also an investor in Pluck, investing $7 million in late 2006.

Demand Media is an amalgamation of seemingly unrelated web properties including the Lance Armstrong partnered Livestrong.com, ExpertVillage.com, GardenGuides.com and GameDelight.com.  Demand is also a domain name registrar, focusing on the .tv domain.  Demand Media has raised over $320 million to-date, with their latest round of $100 million last fall.

While terms of the deal were not made public, TechCrunch reports the price tag was $75 million cash and notes that Pluck revenues are about $10 million.

Web analytics provider Compete.com has been acquired by market research firm Taylor Nelson Sofres (TNS).

Compete, with roughly $15 million in revenue in 2007, is smaller than rivals comScore, Quantcast and Alexa, but has been growing at a rapid pace. The Company reported a loss of $4.9 million for 2007. According to TechCrunch, the deal is for $75 million cash with the possibility of an additional $75 million in earnouts.

Compete was founded in 2000 as an Idealab company. The TechCrunch post notes that they've raised $43 million in funding to-date.

UK based TNS is a more traditional market research firm, so the combination of TNS+Compete should provide clients with a picture of user behavior both online and offline. TNS Media Intelligence is the leading ad-spend intelligence service, while their 6th Dimension access panels survey more than 2 million consumers globally.

Via Alley Insider comes this note that Microsoft (NASD:MSFT) is undervaluing Yahoo(NASD:YHOO), at least according to Bear Stearns analyst Bob Peck.
Peck suggests that the offer would value Yahoo at about 15x:

At $2.1-$2.2 billion of EBITDA, Microsoft’s multiple would only be paying 15x for one of the leading Internet properties and online advertising player.

But, as Blodget points out, 15x is only cheap if you think that 2008 is an aberration and that Yahoo will return to strong growth in 2009.

Meanwhile, Kara Swisher at All Things D suggests that Microsoft might come back with a lower offer, especially following Yahoo's weak January results and their newly announced severance plan. Kara suggests that:

If signs of business weakness at Yahoo worsen, several people suggested to me that Microsoft should make a slightly lower offer for Yahoo and promise the difference between its old bid and new one to Yahoo employees as a rich retention plan.

In another twist, the New York Times ran an interesting piece this weekend suggesting that Microsoft should drop its pursuit of Yahoo altogether and go after SAP (NYSE:SAP). In that article, Randall Stross argues that Microsoft should look to increase its strong position in business software by making a bid for SAP, much in the way that Oracle has grown through its acquisitions of BEA, PeopleSoft and i-Flex, among others. The corporate culture and business focus of the two companies are much more closely aligned, reducing risk of the deal.

In a similar vein, RBC Capital Markets analyst Robert Breza writes that Microsoft would be better served going after some higher growth businesses with strong upside:

Salesforce.com (NASD:CRM) at 100 percent premium is $12 billion, Omniture (NASD:OMTR) at 100 percent premium is $3 billion; and that leaves $30 billion to acquire Facebook.

Reed Elsevier (NYSE: RUK) has offered $4.1 billion ($50 per share) for risk management information provider ChoicePoint, a nearly 50% premium over yesterday's closing price.

ChoicePoint, which spun out of Equifax in 1997, has revenues of about $1 billion. The Company has focused on developing vertical market workflow applications, leveraging content plus analytics, primarily for risk management.  Reed Elsevier will merge ChoicePoint with its Lexis-Nexis division. Together with its Accurint database (acquired from Seisint in 2007), Lexis-Nexis will have a comprehensive suite of solutions for background checks, fraud detection and related tasks.

Reed also announced plans to divest its Reed Business Information trade magazine business.  Via PaidContent, on the conference call, Reed CEO Crispin Davis indicated that the Company is looking to protect itself from an expected advertising downfall as we move towards a recession.

TechCrunch reports that NewsCorp and Yahoo are working frantically to put final touches on a plan to merge Fox Interactive into Yahoo. According to TechCrunch, the details are:

• NewsCorp would spin off Fox Interactive, which includes MySpace, IGN, FoxSports.com, Photobucket and other online properties.
• Fox Interactive would be integrated into Yahoo, along with a sizable cash infusion from News Corp and a private equity fund
• The new Yahoo would be valued at roughly $50 billion, above the $45 billion Microsoft offer, with NewsCorp and the PE firm owning about 20%

The deal would not be simple, according to Arrington. Yahoo would still have to outsource its search biz to Google to make the terms work, which would be likely to raise antitrust issues. Meanwhile, Microsoft is expected to raise their bid to the $35 range this week (roughly $50 billion). There had been earlier rumors of NewsCorp seeking to bid on Yahoo but that they'd had trouble getting private equity interest. The coming week should be interesting.

Over the weekend, the Yahoo (NASD:YHOO) board spurned Microsoft's (NASD:MSFT) $31 per share offer, claiming that the offer "massively undervalues" the stock. That's a bold statement, considering the stock had been languishing in the $18 range until the bid. While the stock had traded in the $40's as recently as two years ago, it's only peeked above the $30 range a few times since, generally on takeover rumors, only to slide back again shortly thereafter.

It sounds as though it's mostly an ego-driven decision, as there are no obvious white knights to jump in with the $45-50 billion it would take to do a deal. While Microsoft may be willing to up their offer a few dollars, the negative response from their shareholders to the initial bid suggests that they would be unlikely to go beyond the $34-35 range.

The Times of London reports that Yahoo is reconsidering a possible merger with AOL (NYSE:TWX) and is also looking at potential deals with DIsney. While a Yahoo-AOL combination would be sizable, it's hard to see how that would provide shareholders with the value of the Microsoft offer. Yahoo has had ample time to get its house in order and failed to do that. Now, with an attractive offer on the table for Microsoft, it seems to be willing to dance with anyone to avoid being acquired by Redmond. Seems to me like it's all about ego at this point and not about shareholder value.

UPDATE: Henry Blodget explains why $31 per share does not massively undervalue YHOO. Meanwhile, Yahoo released the full text of the letter it sent to Microsoft. Turns out that we were wrong; rather than "massively undervalue" they say that it "substantially undervalues" the company. I guess the lawyers at Skadden and Munger Tolles felt that substantially was a more appropriate term. Guess that's why they get paid the big bucks.

Financial trading site MyTrade.com has been acquired by Investools (NASD: SWIM).  MyTrade allows users to customize their online trading page, much as you might add widgets or gadgets on a social net page or on My Yahoo.

Investools will merge the MyTrade platform into their ThinkorSwim online brokerage application.

According to Howard Lindzon, MyTrade went from concept to acquisition in under four months.  Howard indicates that this deal, much like his Wallstrip success, was facilitated completely by the blogger community.  Howard has more details on his blog including (of course) a video.  For those who've missed the lovely Lindsay, she makes a guest appearance in the video.

Congratulations to Andy and Landon Swan at MyTrade.