Claria’s Next Move

You’re preparing to go public, having posted a $35 million profit on $90 million in 2003 revenue. Then suddenly, with no explanation other than “current market conditions,” you withdraw your registration with the Securities and Exchange Commission (SEC). That’s the tale of Claria Corporation, maker of ad-supported software called Gator. The company was formerly known by the latter name itself.

Some speculate controversy over adware prompted the new appellation. Yes, it’s been a hot topic of late. State and federal legislation are pending. There’s also concern about Claria’s distribution methods. In its filings with the SEC, the company revealed it received a “substantial portion” of its distribution through a partnership with Sharman Networks, which distributes Claria software bundled with the KaZaA Media Desktop.

But one little comment, made by Claria CMO Scott Eagle, got my attention: “A number of opportunities have arisen since we filed our S-1, and as a result we are delaying our IPO,” Eagle told CNET News in a story published August 12. Hmm, I thought. “Opportunities” — as in “exploring strategic opportunities” — is so often a coded way of saying you’re looking to be acquired.

I spoke to a few people about the idea this week, and nothing has dissuaded me thus far. (Claria executives declined to comment about future plans.) Still need convincing? How about Claria settling most of the pending legal cases against it? The company this week acknowledged it has, over the course of this calendar year, quietly settled with Wells Fargo & Company, WFC Holdings Corporation, Quicken Loans, UPS, Hertz, L.L. Bean, TigerDirect, and Six Continents. At least two suits, with Interlinx and Teleflora, are still pending. (Teleflora only filed suit August 18.)

Yes, it’s possible Claria would engage in this behavior in preparation for an IPO (witness the recent Google/Yahoo kiss-and-make-up settlement). But stay with me here.

If we accept Claria is in discussions to be acquired, the next logical question is: Who’s doing the acquiring?

Jeff Dearth, a partner in media investment banking firm DeSilva & Phillips, narrowed things down this way. Dearth pointed out America Online’s recent acquisition of Advertising.com whet selling-inclined executives’ appetites. If you compare the acquisition price of $435 million (cash) to Advertising.com’s 2003 profits, you get a multiple of 23. If you apply that same multiple to Claria’s 2003 earnings, you come up with a whopping $805 million. The company did $35 million in profits on revenue of $90 million in 2003, according to its SEC filings.

“That’s a good-sized company that’s throwing off a lot of cash,” Dearth told me. “For the better companies in this space, we’re back in a frothy environment. They might get four to five times revenues or a double-digit multiple of EBITDA [earnings before Interest, Tax, Depreciation and Amortization].”

The $805 million number effectively rules out all but a few players. DoubleClick, itself a veteran of privacy controversies, no longer has a media business. It only once paid so much for an acquisition, when it bought Abacus for $1.7 billion. For reasons of fit or price, I’d rule out aQuantive, ValueClick, and 24/7 Real Media, too.

Another clue. The company has been working for some time on a product called BehaviorLink, which basically takes Claria’s technology and data and serves ads on publishers’ pages rather than via pop-ups. Claria describes it thusly: “An advertising service that we expect will enable us to display behaviorally-targeted banner and other display ads to our users through existing advertising placements on the Web pages of partner sites.”

The company has been talking to media buyers and publishers about the new effort, so there have probably been plenty of occasions during which the acquisition topic might arise.

Names that kept coming up in discussions were those of the big portals. My colleague Nate Elliott, for one, is skeptical. “I’d be surprised if any of the big portals were looking to acquire Claria,” he told me. “Their numbers look pretty attractive, but the big players in online marketing probably wouldn’t want to bring that kind of controversy in house.”

Still, Dearth seems to think it’s a possibility. “Who, beyond AOL, would want to be in this business?” he speculated. “There aren’t many. You’re getting down to some major portals.”

Dearth had already ruled AOL out of the equation, given the dough it just plunked down for Advertising.com. MSN? Not likely was the consensus. “I don’t think Microsoft needs the headache,” Dearth said. I’d have to agree. The company has enough of an “evil empire” reputation as it is. It’s always been content to be late to market and blow its competition out of the water.

There’s always the Google possibility. The company is certainly flush with post-IPO cash. The search giant has been making acquisitions of late and seems to favor ad-supported tools over content. Google definitely needs to expand distribution of its ads. Behavioral targeting could add a whole new dimension to what it’s capable of doing. So, there’s potential.

Yahoo would be a better candidate, though. Yahoo’s Overture is already quite cozy with Claria. The portal’s ad division was responsible for 31 percent of Claria’s revenue in 2003, according to SEC filings. Yahoo does a lot of behavioral targeting within its network. (I wrote about some offline/online efforts in a recent column.) If it could do the same across the Internet, perhaps delivering ads through an Overture-style media network, it could be a pretty powerful offering.

Would Yahoo want to wade into the mire of controversy? Well, it’s definitely not been shy about using member data in the past. Remember the privacy preferences flap that ended with New York Attorney General Eliot Spitzer giving Yahoo a $75,000 wrist-slap? And Claria, only a few months ago, appointed a former FTC attorney, D. Reed Freeman, to the newly created role of chief privacy officer.

I don’t have any conclusions here, just lots of ideas and possibilities. Thankfully, our industry has become full of ideas and possibilities as of late. I think Dearth put it best when he said: “There is definitely some money out there looking to make bets. With the multiples, at least the comparables… heck, everything’s for sale at a price, right?”

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