IAC To Buy Ask Jeeves, Shaking Up Search

The search wars took another interesting twist today as IAC/InteractiveCorp. announced it would buy search engine Ask Jeeves for around US$1.85 billion in stock.

The move pairs IAC, a fast-growing e-commerce and social networking conglomerate with a powerful brand in several key online markets, with the search technology and name recognition of Jeeves, long one of the top five search sites but one that lags well behind the giants of the space: Google, Yahoo, MSN and AOL.

IAC Chairman and CEO Barry Diller said the deal would bring a range of synergies and benefits by teaming IAC’s wide range of Internet properties, and their millions of monthly users, with a search engine that can help them find what they’re looking for faster. He positioned the purchase as a move aimed at capturing more revenue both now and as new search models emerge.

New Opportunities

“We believe that in the future [Ask Jeeves] has the potential to become one of the great brands on the Internet and beyond, and by beyond we mean in wireless, in the search for anything on any device,” Diller said. “It is that belief … that is the impetus for this transaction.”

Analysts widely agreed that the deal created new opportunities for both companies. IAC gains technology it can integrate into its sites, such as Expedia, TicketMaster and CitySearch. And because its search box will be integrated into all of IAC’s Web properties, Ask Jeeves gets an instant pool of some 44 million monthly users, a windfall that could help attract more advertisers.

“Joining IAC will enable us to play on a much larger field,” Ask Jeeves CEO Steve Berkowitz said. “Ask Jeeves will now be in an even stronger position to aggressively grow market share.”

The deal calls for Ask Jeeves shareholders to receive 1.26 shares of IAC stock for each share they currently hold. Jeeves shares rocketed higher in early trading today, rising as much as 13 percent to $27.38. The stock had lost some altitude since peaking at nearly $45 per share last April. IAC shares, meanwhile, were down about 4 percent to $21.23.

The search engine will remain an independent brand and keep its current headquarters in Oakland, California. Berkowitz will remain CEO. IAC said the deal will likely be completed before its planned spinoff of its travel properties, which is targeted for the third quarter of this year.

Stanford Group analyst Clay Moran told the E-Commerce Times that the price seems to be a bargain. It values Ask Jeeves at about 15 times current year’s earnings, while other similar deals have priced close to 20 times.

Competitive Advantages

“We think the stock is worth a lot more,” Moran said. “We view this as a real steal for Barry Diller.”

Ask Jeeves executives said the fact that the deal is all-stock has its own benefits. In addition to avoiding tax exposure for shareholders, it gives Ask Jeeves and its shareholders a stake in the future of IAC as well as access to both Web traffic and the capital it will need to continue to keep pace with its larger rivals while also staving off a number of upstart competitors.

Indeed, analysts said Ask Jeeves’ profile could be boosted significantly by the IAC buy, especially given Diller’s experience in advertising and entertainment.

Over time, Google might stand to lose some direct business from the merger, since Ask Jeeves was a distribution partner, helping to populate the Web with paid listings. However, the more fundamental competitive changes are seen as far more important.

In a research note, Goldman Sachs analyst Anthony Noto said Ask Jeeves’ brand will get a boost. “Ask Jeeves will also have greater financial resources to invest in technology that is necessary to compete with other large, better capitalized competitors, including Yahoo, Google and MSN,” Noto wrote.

Though its stock has fallen some since last year, when the ripple effect of the Google IPO created huge interest in search and search stocks, Diller might be buying Ask Jeeves on the way up. According to comScore Networks, Ask Jeeves saw its share of all U.S.-based Web searches jump to more than 5 percent in December, double its share of the market from a year before.

Other Moves

It also has begun to follow the lead of Yahoo and Google by making key acquisitions and rolling out new products. Diller said Ask Jeeves would focus on local search, for instance, and the company has already launched a desktop search tool and recently bought a blogging indexing firm that will help ensure it has plenty of virtual landscape on which to place ads. It also recently signed portal Lycos as a customer, displacing Yahoo subsidiary Inktomi in the process.

For its part, IAC recently signaled a new interest in e-commerce when it bought catalog and online retailer Cornerstone for $720 million. Search and commerce are increasingly being seen complementing one another online, as consumers face an ever-growing array of choices. Both Yahoo and Google have shopping-focused search sites, and MSN is preparing to launch its own version.

“I think this is a great deal for Interactive,” Moran said. “There are synergies and they will be able to use them to drive and enhance traffic, to create a strong presence in local search, and they got it all at a great value. The resulting business is an attractive one and will probably be a good one long-term.”

Moran said Ask Jeeves might have wanted to sell before it lost more ground to larger, more well-heeled competitors than it could make up, but said Ask Jeeves was in a position, even if it could only maintain its market share, to see strong growth as the overall search market grew.