...a takeover of Marchex could make sense down the road. One investment banker that is working with other online ad companies said that this is just the beginning of a massive wave of consolidation.
The ad merger target that’s right next door
May 22, 2007
Now that online ad firms aQuantive (AQNT) and 24/7 Real Media (TFSM) are getting scooped up by Microsoft (MSFT) and WPP Group (WPPGY) respectively, Wall Street appears to be betting heavily that ValueClick (VCLK) will be the next company in this suddenly hot market to get taken over.
Shares of ValueClick have zoomed nearly 25 percent higher since Microsoft announced its staggering $6 billion takeover of aQuantive on Friday. But there’s another lesser known public online ad company that is also benefiting from the latest round of dot-com merger mania.
Marchex (MCHX), a company that has made a name for itself by buying Web sites with generic domain names that it then turns into targeted sites focusing on local advertisers, has seen its stock shoot up more than 12 percent since Friday.
I met with Marchex chairman and CEO Russell Horowitz on Tuesday afternoon. And while he said that, as a public company, he’s of course open to a deal, he’s not actively shopping the firm.
In fact, it appears that one reason the stock is doing so well this week is a new partnership Marchex just announced with News Corp’s (NWS) Fox Latin American Channels subsidiary to launch Spanish language Web sites that will be powered with Fox content.
In a nutshell, Marchex has made a name for itself by buying domain names for sites like locksmiths.com, exterminator.com and remodeling.com and turning them into sites that local companies in these trades can go to in order to advertise. Horowitz describes the company’s strategy as “AdSense on steroids,” referring to the Google service that matches online ads to content on partner sites. Marchex also owns Web sites for zip codes.
With the Fox Latin American Channels deal, Marchex has bought up scores of Web sites catering to the Spanish-language speaking community, sites such as cocina.com and salud.com. Fox will provide videos, blogs and other community content to the sites.
In essence, Marchex is a corporate version of Web entreprenuer Kevin Ham, who has made a fortune by buying and selling domain names and was recently profiled by my sister publication Business 2.0. In fact, Marchex bought more than 100,000 domain names from Ham rival Yun Ye in 2004.
Horowitz said that Marchex should be able to thrive on its own as long as it sticks to its strategy of focusing on local search, a relatively untapped market. In addition, Marchex is partnering with several other big names to expand its local presence. For example, Marchex’s online ad platform powers the local search marketing services on the Yellowpages.com site owned by AT&T. “There is no Google in the local service so we’re as well positioned as anybody,” he said.
However, Marchex could soon face some tougher competition. Horowitz points out that Marchex’s growth potential - Wall Street analysts expect earnings to increase 25 percent in 2008 and at an annual clip of about 30 percent on average for the next few years - has attracted interest from the venture capital community.
Sequoia Capital, for example, has invested in NetShops, which is a collection of online retailers. And VC firms Highland Capital Partners and Summit Partners have both funded NameMedia, a buyer and seller of domain names.
So with other Internet ad firms all in a hurry to team up with larger rivals, will Marchex succumb to the urge to merge?
Horowitz was coy but did seem uninterested in selling out right now. “We get the calls. But we are a young company,” he said. “We’ve got all our ingredients and we’re now starting to mix them all together to put them in the oven. Our job is to listen to offers but that being said, we have a lot of opportunities ahead of us.”
Nonetheless, a takeover of Marchex could make sense down the road. One investment banker that is working with other online ad companies said that this is just the beginning of a massive wave of consolidation.
“There is remarkable value in companies that facilitate the placement and performance of online media. It’s a pain in the butt to manage online ad campaigns,” said Tolman Geffs, a managing director with The Jordan, Edmiston Group, a boutique firm focusing on media mergers. ”Marchex does something different from the other online ad networks but it does seem like every single search agency is for sale right now.”
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