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Friday, September 19, 2003

Pre-Post-Merger Hangover for FindWhat-Espotting

Espotting's financials weren't what they seemed on the surface, say FindWhat officials, forcing them to restate earnings guidance for this fiscal year and causing them to reopen negotations around the merger, which has yet to be finalized.

As of this writing FindWhat (FWHT) shares are down about 20% at $21.75. Putting this in perspective, the shares traded at $10 as recently as early May, so the prospect of a potential unravelling of the merger is by no means catastrophic.

Espotting didn't look like a company that would be easy or quick to integrate with FindWhat, so it stands to reason that much of the decision to merge, and the valuation placed on Espotting, had to be related to the latter's ability to add incremental revenue and profit to the picture regardless of near-term synergies. In light of FindWhat management's claim that Espotting is not, in fact, profitable, it is entirely possible that the merger will be nixed and that FindWhat will carry on on its own.

At the very least, FindWhat management will renegotiate the valuation placed on Espotting. One would expect very little cash and less equity going to Espotting's principals in the new deal, if there is a deal at all.

Either way, FindWhat should carry on relatively unscathed. All indications are that advertisers continue to discover the service, likely pushing average costs-per-click prices up. Some believe that Google and Overture are enjoying faster price-per-click inflation, but nonetheless, if FindWhat can hold onto its #3 position, it's still in a solid uptrend.

Posted by Andrew Goodman




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