Ask Jeeves Buys Search Technology Provider Direct Hit

Updated from 11:15 a.m. EST

Ask Jeeves

(ASKJ)

, the Web-based question-and-answer service, has agreed to acquire privately held

Direct Hit Technologies

, a provider of search technology, for about $517 million.

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Shares of Ask Jeeves were up 2, or 2%, to 101 in early trading Tuesday.

Ask Jeeves will exchange 5.12 million unregistered shares for all outstanding shares, warrants and options of Direct Hit.

The deal is expected to close sometime in the first quarter.

Users of Emeryville, Calif.-based Ask Jeeves type in questions -- such as "Who invented the Slinky?" and "What is the total weight of the earth without people?" -- and receive back a list of possible Web sites with answers. That service will be enhanced with the addition of Natick, Mass.-based Direct Hit, a search engine which tracks Web sites according to past user preferences.

"It's a very forward-looking deal," said analyst Carolyn Trabuco of

First Union Securities

. "Ask Jeeves will be even more refined in how it offers selections to people. Direct Hit adds a layer of almost predictive searching with more contextual relevance."

Together, the two companies expect to access 80 million Web users.

The acquisition will also complement Ask Jeeves' corporate business-to-business services, or corporate question answering service. "Direct Hit currently syndicates its search engine technology to corporate customers on an outsourced basis, which we believe will be complementary to Ask Jeeves' current corporate business model," analyst Jack Ripsteen of

Chase H&Q

wrote in a report. "Currently the majority of Direct Hit's revenue is from syndicating its search technology to businesses."

He rates Ask Jeeves a buy and his firm has done underwriting for the company.

"Importantly, we believe the greatest positive impact of the Direct Hit acquisition will be the additional data aggregation and customer intelligence that Ask Jeeves will gain... We believe Jeeves will be able to integrate the user preferences ... across Ask Jeeves' business," added Ripsteen. "We believe the additional intelligence gained via Direct Hit will enable Ask Jeeves to offer a more robust customer interaction technology platform to its corporate customers."

Ask Jeeves' management indicated that the acquisition will add about $8 million to $10 million in revenue and an additional $5 million in losses for fiscal year 2000. For fiscal year 2001, the acquisition will add about $27 million in revenue and be neutral to the bottom line.

The price for the deal equals about 20 times 2001 revenues, which is a "premium to what content trades at on the Web but in line with

LookSmart

(LOOK)

and

About.com

(BOUT) - Get Report

," said Trabuco, who considers the deal's terms to be fair.

On Dec. 22, Direct Hit filed a registration statement with the

Securities and Exchange Commission

for an initial public offering. Trabuco believes the company is better off as an acquisition. "It's much better with Ask Jeeves than as a standalone company," she said.