Saturday, March 27, 2004
The Case for Infospace + Google
Infospace's seemingly innocuous acquisition of a local online search provider called Switchboard for $160 million in cash may be a harbinger of an impending domino sequence in the local search market and the search engine industry in general.
Along with CitySearch, MSN, AOL, Yahoo, Google, various yellow-pages companies (plus some hangers-on and wannabes), Infospace is one of a short list of real powers in local search. That its recent acquisition was for cash suggests that Infospace believes its stock to be currently undervalued, something you couldn't say for too many Internet companies today.
Google is an emerging player in local search and is attempting to hang on to its status as the #1 search provider in the world. But meanwhile, companies like Yahoo are bulking up and waging battle; and one of the biggest economic powers in the world, Microsoft, is getting ready with its own strategy. There is going to be no tougher area to consolidate than local search; it will likely remain a fractured affair. But the company that sees the opportunity to roll up undervalued properties in this area will reap significant capital gains in the future. Thus far, Google's main idea seems to be to build their own products and expect that users will like them and growth will ensue. Maybe so, but going up against major competition, it probably wouldn't hurt to buy a little insurance.
The disadvantages of Google's slow march to an IPO, coupled with an understandable "we'd rather build than buy" mentality (though Google has certainly snapped up some cool assets for cheap), may now be growing more apparent. Every time Yahoo takes another key revenue generator off the table, such as Kelkoo, it consolidates its position. This month's issue of Fortune magazine cites Yahoo as #831 on the Fortune list, but with just one or two more Kelkoo-scale acquisitions, and continued growth, it will crack #500 far ahead of the schedule Fortune projects.
Google, therefore, needs to consider whether size does indeed matter, particularly in the hotly contested local search market. Infospace could offer some insurance. Instead of Google (post-IPO) acquiring small pieces of Infospace (unlikely since it is going to be difficult to pry prime local listings assets from any of their owners, Infospace included), Google could acquire the whole company. Infospace has an impressive list of valuable assets in search and other areas, some of them arguably underutilized or forgotten. These include, of course, popular metasearch properties which could potentially be reinvigorated under Google's watch. (There are also wireless technologies and lines of business that could be either deemed valuable to the business of a global search leader, or simply sold off.)
Consider Metacrawler and Dogpile. Currently, these metasearch properties are significant sources of revenue for several of Google's competitors, including LookSmart, FindWhat, and Overture. By acquiring these, Google could reduce the number of paid links in Metacrawler results, especially those emanating from competitors' keyword ad networks, while taking out a bigger share of that ad revenue pie for itself. This was the same strategy used when Google acquired Applied Semantics, whose DomainSense keyword listings were a major source of revenue for Overture and FindWhat.
If ballpark valuations of Google in the range of $14 billion are accurate, then Google is worth about a dozen times more than Infospace, at least on paper. Sure, Google could raise some IPO cash and then offer Infospace a cash-plus-stock deal they couldn't refuse. But I like the idea of Google and Infospace throwing us a curveball and cooking up a reverse-takeover scheme, leaving Infospace shareholders with a fair but relatively small proportion of shares in a new public company called Google. I'm not sure a reverse takeover on that scale is even legal. But Google taking the back-door route to going public would certainly confound and infuriate the bankers, the press, and the public, who have already speculated to the nth degree about a traditional IPO for Google. Some have even dreamt up bizarro scenarios such as a "Dutch auction."
The suspense is killing me.
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