$164,000,000 Sale? (domain portfolio)

Marchex purchasing pile of Web domains
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Marchex said yesterday it has agreed to buy the assets of Name Development, a Virgin Islands company that owns thousands of Web domains, for $164.2 million ? a move executives said would expand its distribution footprint for customers.

Seattle-based Marchex, which went public in March, partners with companies that sell items online and helps them advertise through paid listings in search-engine results. It will pay $155.2 million in cash and $9 million in stock for the assets, with the deal estimated to close in the first quarter of next year.

Marchex said it will announce in the next 30 days how it plans to raise the cash for the purchase. Its share price rose 72 cents yesterday to close at $15.57.

Name Development operates in the direct navigation market, which is based on the idea people will go directly to Web sites for information rather than through search engines. If a person is shopping for a video camera, for example, Name Development hopes the shopper will go to www.videocamera.com ? a site it owns ? to find product information.

Name Development also owns www.debts.com and thousands of other sites, and sells links and other advertising on those sites. Marchex said it expected those sites to report $19 million in ad revenue in 2004.

Buying the sites will give Marchex a portfolio of more than 100,000 Web domains and a base of online user traffic estimated at 17 million, the company said.

Marchex can use the Web domains as new locations in which its customers can advertise.
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Marchex solidifies its Web presence
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Deal lets company move into 'direct navigation'

By JOHN COOK
SEATTLE POST-INTELLIGENCER REPORTER

Seattle-based Marchex Inc. is spending $164 million to buy certain assets of Name Development Ltd., an obscure British Virgin Islands corporation that owns thousands of Web sites.

The privately held company -- with 17 million visitors last month -- operates Debts.com, LasVegasVacations.com, CareerInfo.com, RentGuide.com and thousands of other Web sites in categories such as travel, financial services and electronics.

It is the biggest purchase yet for Marchex, a publicly traded company that has grown rapidly through a series of acquisitions since its founding by former Go2Net executives in January 2003.

Marchex will pay $155 million in cash and $9 million in stock for Name Development. It plans to announce a financing package for the purchase in the next 30 days.

"This transaction gives Marchex a broad footprint in one of the most rapidly developing categories of Internet user traffic," Marchex CEO Russell Horowitz said in a webcast yesterday.

Citing Securities and Exchange Commission regulations, Marchex declined to comment beyond what was said on yesterday's webcast. Attempts to reach Name Development and the Caribbean Island trusts that make up the corporation were unsuccessful. The company's management and employee headcount were not disclosed

Marchex plans to use the acquisition to expand into an area known as direct navigation, an Internet search technique in which consumers type the domain name of a Web site directly into the address box of an Internet browser.

For example, online shoppers looking to buy a digital video camera could type www.videocamera.com into the browser and access one of Name Development's Web sites. At the site, shoppers would then be presented with other links to continue their shopping.

At VideoCamera.com -- a Name Development site -- shoppers can link to online video camera stores at eBay, Sears, Hitachi and others. If a purchase is made, Name Development gets a commission for referring the shopper.



Direct navigation is becoming a popular way to conduct Web searches. According to WebSideStory, 67 percent of online users visited Web sites using the technique in September. That compares with 53 percent in February 2002. Marchex estimates that about 10 percent of the $4.5 billion Internet search market is tied to direct navigation.

Marchex believes that by amassing more than 100,000 Web sites that attract as many as 17 million monthly visitors, it will be at the forefront of the industry.

"With the acquisition of these assets, Marchex will be one of few companies that own both proprietary search marketing services and a large proprietary source of online user traffic," said Horowitz.

That traffic base should grow as Marchex improves the functionality of the Web sites and leverages partnerships with online shopping sites such as Yahoo!Shopping and Internet search engines such as Google, Horowitz said.

The $164 million deal is unusual given that it involves a relatively unknown offshore entity, said Alan Davis, an analyst at McAdams Wright Ragen.

"They are being pretty private about it, that is interesting," said Davis. "It is not a traditional business, but it is certainly a growing and cash-flow-positive organization."

Name Development is projected to have more than $19 million in revenues this year, with operating margins expected to top 80 percent. It generates about twice as much cash flow as Marchex, said Davis.

"It is minimal employees and a bunch of domain names, and they are driving revenues off of that," said Davis. "It is highly profitable."

Go2Net, an Internet superstar that was sold to Bellevue-based Infospace for about $1.5 billion in 2000, grew through some untraditional methods, noted Davis. That also appears to be a tactic employed by Marchex -- made up of former Go2Net executives such as Horowitz, John Keister, Ethan Caldwell and Peter Christothoulou.

In addition to Name Development, Marchex has purchased Provo, Utah-based Enhance Interactive and Eugene, Ore.-based TrafficLeader.

"It has always been part of our strategy to identify undercommercialized and underleveraged assets that can add dynamic and defensible growth components to our business," said Horowitz, who expects revenue to top $43 million this year.

The purchase of Name Development, which is expected to close early next year, could add $24 million in revenues to Marchex next year, said Davis.

In March, Marchex started trading on the Nasdaq stock market at $6.50. It closed yesterday at $15.57, up 72 cents on the day.