|Search stocks Ask Jeeves, Yahoo! and Google have taken a hit in recent months.|
|†* based on data as of 3/18/05 |
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NEW YORK (CNN/Money) Ė The game of merger musical chairs in the online search market just got a lot more interesting.
IAC/InterActive, the Web conglomerate controlled by media mogul Barry Diller, is buying Ask Jeeves for $1.85 billion, or $28.24 a share, about a 16 percent premium to Friday's closing price. It is the second significant deal in online search this year. Last month, the New York Times agreed to purchase About.com from Primedia for $410 million.
And now Wall Street is betting on even more consolidation.
InfoSpace, which owns search engines Dogpile and MetaCrawler, was up nearly 5 percent Monday morning. Other smaller companies, including FindWhat.com, LookSmart, Mamma.com and GuruNet, which owns search engine Answers.com, were each up sharply as well.
But is the excitement justified?
Merger shows there are search bargains...
Monday's move follows a rough couple of months for the online search group. Shares of leaders Google (Research) and Yahoo! (Research) have taken a hit on fears that growth may be slowing and that intense competition may hurt advertising rates.
Google's stock has fallen 10 percent in the past 2 months and Yahoo! has sunk 15 percent.
Smaller companies like Ask Jeeves (Research) and FindWhat.com (Research) have fared worse, plunging 19 percent and 35 percent, respectively, as Wall Street worried whether the search market was big enough, especially with Microsoft's improved version of its MSN search site.
But Mark Mahaney, an analyst with American Technology Research, said that IAC's decision to buy Ask Jeeves is a good sign for the group since it reinforces a belief that the online search market should remain healthy for the next few years and that more than three companies can capitalize on this growth.
"Sentiment on search has been neutral to negative this quarter. This is a data point that supports the strength in online advertising for the long-term," said Mahaney.
So IAC's (Research) move could be a signal that the pessimism was overdone and that the stocks are now cheap.
Ask Jeeves, for example, was valued at 17.5 times 2005 earnings estimates before Monday's merger news. FindWhat.com was trading at 13 times projected 2005 profits while InfoSpace (Research) had a P/E of only 21.
"This group as a whole has been depressed in the past three months. I think what you're seeing today is that investors think these companies should be worth a lot more," said Youssef Squali, an analyst with Jefferies & Co.
...but more deals may not be coming
But Marianne Wolk, an analyst with Susquehanna Financial Group, doesn't think that investors' ecstatic reaction is justified.
"We put a relative low probability on the other publicly traded search engine players getting acquired," she said.
She does think that there will be more consolidation in the sector but that private companies are the more likely takeover targets. To that end, Yahoo! announced on Monday that it was buying Ludicorp Research and Development, the operator of the photo-sharing Web site Flickr.
Scott Kessler, an equity analyst with Standard & Poor's, also thinks that it would be a mistake for investors to assume that the remaining publicly traded search companies will soon be bought up.
He argues that Ask Jeeves was a unique situation since it was the largest of the secondary search companies and clearly had the most to offer to a prospective acquirer.
Ask Jeeves was long criticized as being a gimmicky search site where Internet newbies went to ask basic questions that would be answered by Jeeves, the butler character from the PG Wodehouse series of stories.
But the company has transformed itself during the past few years into a legitimate and profitable firm with its own powerful search technology, known as Teoma.
Analysts are forecasting revenue of $384 million for Ask Jeeves this year. By way of comparison, FindWhat.com's sales are estimated to be $250 million in 2005 while Mamma.com (Research) and LookSmart (Research) are only expected to generate revenues of just $26 million and $58 million, respectively.
"Ask Jeeves has a substantial base of revenues, multiple properties and owns novel technology with Teoma. It was an undervalued asset," Kessler said.
Kessler adds that it's looking less and less likely that Microsoft, which obviously has the resources to buy whatever it wants in search, would be interested in any of the smaller companies since it has invested so much in its own technology.
"MSN was the one that may have been a logical acquiring company but they are clearly building as opposed to buying," Kessler said.
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Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking ties to the companies.