What's Hearst's iCrossing Acquisition Worth?

For Hearst, acquiring iCrossing diversifies the publisher's traditional, but challenged, print business with an agency strong in online media and search marketing skills that can help boost traffic to its digital properties. Yes -- but at what cost?

William Randolph Hearst, after all, uttered this immortal line: "Putting out a newspaper without promotion is like winking at a girl in the dark -- well-intentioned, but ineffective."

Indeed, harking back to that wink, search marketing companies appear to have won the attention of publishers, who don't want to publish in the dark online. "Hearst paid a tremendous premium," says David Smith, founder at Mediasmith, estimating the sale at around $325 million. "The original price was about $375 million, but it got cut down after due diligence."

Named execs at Hearst or iCrossing have not confirmed Smith's estimate, but he says, "I know they were talking about those kinds of ranges when I spoke with some M&A people in New York that were involved."



That's the upfront money, according to Smith's sources close to the deal. The folks at iCrossing could also earn another $150 million on the back end based on earnings linked to growth, such as returning a certain amount to the bottom line within the next few years. It's common not to hand over all the money at once when making an acquisition this size, he says.

Smith quickly calculated a few numbers after running through the deal: iCrossing's approximate $121 million in revenue during 2009, $325 million on the front end of the deal, between 15% and 20% EBIDA, and about 2.5- to 3-times fee revenue from clients. Most agency deals go for about 1-times revenue and 5- to 6-times EBIDA.

Confidently, Smith says Hearst paid the price to secure the deal for three reasons. First, iCrossing was one of the few large freestanding digital agencies remaining. Second, the deal was Hearst's first big purchase for a company in the digital marketing space. Third, iCrossing managed to generate earnings last year during a time when most companies did not.

Geoffrey Shenk, managing director at Kenshoo, an Israeli-based digital search marketing agency and tech company, says Hearst bought the digital property to boost its footing and get more involved in the interactive side of media, but beyond the obvious media dollar investments publishers plan to make, he doesn't see a bigger strategic play.

Shenk's colleague Ariel Rosenstein, director of product marketing at Kenshoo, says acquiring iCrossing gives Hearst Magazines access to brands, clients and people that have expertise in integrating online and offline advertising campaigns. Not only for its business, but others, too.

"It really makes me think of the iPad and all of the new tablets coming out this year -- content is moving to the digital arena whether or not publishers want to take it there or are being dragged along for the ride," he says. "Conde Nast has made moves into the digital arena via content reddit.com, for example, so the ability to sell and optimize digital ads is sure to be a skill that all major publishers are looking for right now."

Rosenstein thinks the reported, yet unconfirmed $325 million price tag by a named source seems fair. He explains that Dentsu recently bought Innovation Interactive for a reported $400 million, which included 360i, a smaller agency than iCrossing, and some SEM and Web analytic technology companies.

Reports fluctuate between $325 million and $375 million. Although Hearst has not confirmed a sale price, some believe Hearst had initially bid $250 million for the company last year.

Not all agree. Adam Heimlich, Razorfish group search director, who worked at iCrossing in 2005, thinks the reported price bodes a little high. It's also telling how people view the agency business. "From the beginning, iCrossing was built by finance guys, not agency, who got into search to make money," he says. "It was venture-backed. They were a bunch of guys just trying to make money and not really interested in professional search services or online media."

Selling the business to Hearst, in a way, is in keeping with the iCrossing guys wanting to run a money-making venture first and provide world-class professional search services second, Heimlich says. He points to iCrossing's acquisition of NewGate Internet in 2006, for example, as helping to pump up its paid-search services.

Hearst will fold iCrossing into Hearst Marketing Services, which it recently created. As the lone business within the new unit, iCrossing clients include Coca-Cola, Bank of America, Epson and Toyota. The company plans to offer bid and feed management, SEO automation, display ad-serving services, optimization, and dashboard reporting, among other services. Whether it moves to a model that generates content and headlines for its online magazines based on keyword searches remains to be seen.

Forrester Research published a report giving iCrossing top honors for paid search and SEO services. In the January 2009 report, Forrester Principal Analyst Shar VanBosirk explains a reluctance to embrace the agency's plan to expand into a more full-service firm. Progress toward creating viable, useful and engaging customer experiences convinced her otherwise that the company continued to head down the correct road. She pointed to linguistic profiles, tools to expedite SEO-friendly page changes across large Web sites, and reports to monitor universal search as three of the factors leading to the decision.

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