"What If" Mergers

Summer seems to bring with it more than just warmer weather. It also seems to bring with it increased activity in mergers and acquisitions. This time last year, we saw within a sixty day window deals that included Valueclick buying Webclients, MTV buying Neopets, Scripps' purchase of Shopzilla, eBay dong the same with Shopping.com, Experian's acquiring LowerMyBills, and NewsCorp's famed acquisition of MySpace. This summer has yet to match the frenzy of last year, but has had several worthy deals, ones that signify the maturity of the market. They happened one after the after, and we covered the first, 180 Solutions' purchase of Hotbar, in our June 8th issue and the other, the merger of Vendare and Netblue, last week. This week we cover another big merger, but unlike the newly formed Zango and VendareNetblue, this one is a work of fiction.

If I had my wish, I'd raise $500 to $750 million and acquire/merge three to four companies to create a multi-billon dollar powerhouse that I feel would become the largest player in the performance advertising arena outside of Google and Yahoo. The companies that I like and would want to fit together most likely wouldn't end up together on their own. Each has a vision that it must execute and couldn't build its business upon the hopes of a merger. That doesn't stop someone like me from saying "What If?" The one described here does not come from my one-half to three-quarter billion dollar wish list. It stems from thinking about VendareNetblue and why if two others were to come together it might present a good opportunity for a future exit for their stakeholders.

The performance-based Internet advertising space has spawned, quite amazingly, more than a few self funded companies with several hundred million dollar valuations. Two of those success stories have taken in considerable funding, almost $110 million between them, and are household names among those who have anything to do with CPA advertising. The two companies in this particular "what if" scenario both got their start in email, with one remaining 100% focused on the channel and the other diversifying to occupy a spot in between a Commission Junction and an Advertising.com. What makes the potential merger of the two exciting is that separately they stand a chance, together they could tell a story that would in my opinion interest institutional investors more. And, with their level of funding, I can only assume an exit remains top of mind for some shareholders.

The two companies are none other than AzoogleAds and Datran. I first heard of the former when working at Advertising.com and talking to email publishers. They spoke of this company in Canada that they used as a list host. That company had its own list and made its technology available to others. Having amassed this body of publishers, they made the leap to network, leveraging the collective inventory of all rather than just their own. Their relentless focus on the publisher helped them to become the largest email ad network in less than a year. By adapting to market needs, they managed to grow even when email declined. Today, their offers make up a decent percentage of revenue of several of the best arbitragers whether that be in search or display. They do what others can't or won't – they act fast, push for the best rates from advertisers, and act as a partner rather than pure network, doing almost whatever it takes to keep their top performers still performing. Some of the stories I have heard are amazing, and Azoogle does this despite having investors.

Started not long after Azoogle, Datran got its start the old fashioned way, they bought email addresses through co-registration, built up a large list, and mailed offers to the list. Fast forward three and a half years, and today Datran runs the largest email list management company in existence and sends more email than perhaps any other company. They did well enough for VantagePoint, who had a victory with Intermix Media, to invest $60 million in the company. It's an incredible story, especially if, like me, you remember meeting the former Traffix guys back when they fit to a tee the stereotype of an "emailer." And, that's not necessarily a compliment.

Datran realized what many did, that nothing mattered more than delivery, and if a company could get into the inbox, it would make money. Having decided this, they had a decision to make with respect to growth. A company could only get so big with its own list. At some point, it would have to start dealing with others' lists. They could go down the typical service provider path, much like an SEM and earn a slim margin by letting others compose messages and hit send, or they could move up the value chain, and thus the margin chain, and control as much of what gets sent to not just their list but others' lists. They opted for the latter, and, borrowing a phrase from a one of the more impressive entrepreneurs I've met, Datran decided to become a principal rather than an agent. They may have just purchased a list host, but the core company acts very different than one.

The VantagePoint funded Datran grew as the incentive promotion market grew. Incentive promotion companies such as Gratis Internet, TheUseful, WebClients, the now-defunct MetaReward, and Netblue, generated as part of their operations millions of email addresses. As I wrote in one of my earliest pieces, mailing to them in a post CAN-SPAM, post spam filter world did not equal guaranteed money. Enter Datran who focused on the two essential ingredients in the modern email landscape – ISP relationships and technology. Datran had a relentless effort on both, making sure that email got delivered to the inbox better than any other commercial mailer, and, by creating value with their core technology that learns what users respond to, and sending them offers based on this learning. All told, they could take healthy margins because they still made more than individuals could do on their own. The company since expanded to handle more mainstream email lists from some very impressive blue-chip companies, playing more the list host than list monetizer. That makes sense, as an upmarket push allows them to leverage their assets, gain increased credibility, and not have to rely on the declining incentive space for money.

What makes Azoogle and Datran interesting to me is that I believe each will find challenges as they look to participate in some additional capital event, e.g. a sale or IPO. With Azoogle, while they do host many of the offers, they have an incredible sales force with incredible relationships, but they do not have the same strength technologically. I could see investors wondering whether they can sustain the rapid growth and build a more defensible position. As for Datran, they have a very buttoned up story, but they are in email, and as a colleague mentioned, it's hard to see the big fund guys getting excited about email. The company does have an affiliate arm that acts much like eMarketMakers did for Vendare, to help gain additional exposure for offers running on their lists and as a means to bring in new offers, but they don't have the scale yet. Combine the two and you have a company that left email to become a network, joining a company that owns a delivery channel but doesn't have a network. Together, I could see them going public and putting up the numbers that would have investors interested and the rest of us envious.

Comments

[matt]

i like the creative thinking going on to create scale and diversification. u should do a monthly or biweekly what if

[jeff paul internet marketing]

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.