The future of eSpotting

September 30, 2003

Up until a week ago, things were looking pretty rosy for European pay-per-click search network Espotting.

It had just celebrated its third birthday as one of the UK's few internet success stories since the dotcom bust, and in June this year successfully negotiated a £100m deal to merge with US firm FindWhat.com.

But Espotting's run of good luck has hit a snag after its would-be suitor FindWhat released a statement saying that it is currently renegotiating the terms of the merger to try and reduce the purchase price, adding that it could walk away from the deal if "mutually agreeable" terms could not be reached.

FindWhat said it was renegotiating the merger as a result of its post-signing examination of Espotting's historical data, suggesting that it may have found some surprises in Espotting's books. It previously estimated that Espotting would have 2003 pro forma earnings of $7.5m on revenue of $75m, but has now retracted all prior statements made regarding Espotting's historical and projected financial performance.

The merger, which was scheduled to close in the fourth quarter this year, is a crucial move for Espotting, giving the European-only firm the opportunity to gain a foothold in the US and continue to compete with Google and Overture - who's merger with Yahoo! has experienced no such difficulties - in Europe.

Espotting refuses to comment on the renegotiations, leaving the situation open to interpretation. Did Espotting deceive FindWhat about its profitability or financial prospects? Did FindWhat misjudge Espotting's potential? Or is FindWhat - which is itself struggling - simply attempting to strike a better bargain?

FindWhat is not exactly rolling in cash and released a report earlier this year that warned of potential problems in a pending patent case over its technology, which Overture claims is in breach of its own patents, as well as concerns over its limited experience in the field compared with its rivals. The company had $29.5m in cash at the end of June and raised a further $20m through a private placing in July.

But it is well aware that Espotting's cash position is weak, having already advanced the company $2m after the deal was signed in June. Should the deal fall through, Espotting is likely to be required to pay the loan back, which could force its hand in renegotiations over the merger terms. Some industry sources have suggested that the renegotiations will see the merger become more of a takeover, and that FindWhat will push for more control by getting rid of the majority of Espotting's existing management team.

Espotting's financial situation isn't made any easier by the fact that FindWhat has to conform all of its historical financial results to meet the US Generally Accepted accounting Procedures (GAAP), which could affect its revenue/profitability position. On top of that, the market for search advertising is constantly changing and consolidating, meaning that competitive conditions already differ significantly compared with when the deal was signed.

Google and Overture are both continuing to expand their European operations putting more pressure on Espotting, while the Yahoo!-Overture merger will give Overture access to huge financial resources, as well as the world's largest internet audience. Google is not likely to be short of a bit of cash either, particularly when it finally carries out its much-anticipated IPO. Some estimates have put its value at £15bn upon float.

So where does all this leave Espotting? The issue is likely to be resolved by lawyers, since its merger with FindWhat now looks an essential route to survival. Whether it will be forced to agree to a less sweet deal will come down to the balance between ensuring the deal goes through and the finer print of the deal already signed.

The company's chances are better if the merger with FindWhat does go through, since it will be able to sell its services to FindWhat's US customers, enabling it to compete with Google and Overture on their home territory. FindWhat has also just signed a major partnership in Japan, representing its first step into Asia, and becoming a global organisation. The deal also gives the Espotting access to better, if somewhat limited, financial resources.

But critically, a collapse of the deal is likely to be a major blow to the confidence of its clients and investors, some of whom are already thought to be turning to Overture and Google as the safer bet, despite - in Europe at least - Espotting's greater coverage and continued delivery of huge ROI for advertisers.

Consultant and author of 'Search Engine Marketing', Mike Grehan, said he believes that Espotting still remains the best option in Europe, giving the best results and best service. And apart from some recent complaints posted on the affiliates4u marketing forum by Espotting partners whose payments were delayed by up to two months - it is difficult to find anyone willing to say anything negative about Espotting. The company assures Netimperative that all the late cheques have now been paid, and admitted that it could have communicated better with the affiliates concerned over the delay.

In the space of three years, Espotting has grown from just a handful of staff based in the living room of one of the founding members, to about 180 employed across 10 European countries. It is one of very few UK businesses to have survived and thrived in the internet sector.

However, as the market consolidates and matures, it faces a huge battle to cling on to its European advantage. Google and Overture are now poised to dominate as their financial resources grow and as they push their ability to handle worldwide campaigns and accounts. Ask Jeeves ditched Espotting for Google AdWords in the UK earlier this year, primarily because it worked with Google in the US.

Without a US partner's presence and finances, Europe's plucky contender cannot hope to last against the new heavyweights.

Source: Net Imperative

        

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