If mergers and acquisitions are the crack cocaine of corporate America, then
purchase of privately held search engine technology company
should provide investors with a long-lasting high.
Ask Jeeves, a Web-based question-and-answer service whose mascot is a butler, agreed Tuesday to acquire Direct Hit in a deal that "definitely patches up the holes that Ask Jeeves has," says Danny Sullivan, editor of
Search Engine Watch
, a Web site that covers search engines. Sullivan has not done consulting for either company.
The deal, expected to close by the end of this quarter, is a stock swap valued at around $500 million. On Tuesday, investors bid up shares of Jeeves more than 5, or 5%, to 104 1/2, on a day in which the major market indices posted modest gains.
Search for Tomorrow
Jeeves has quickly established itself as one of the leading companies in the Internet's growing search engine market. In particular, the company's corporate service, which acts like a sort of virtual customer-service representative, has proved popular with big businesses and attracted the attention of investors. But like a bumbling butler, Jeeves' natural language search technology is far from perfect. Because the technology requires a staff of human editors to review and index Web pages, the technology is costly, slow and unable to keep pace with the mushrooming cloud of online content.
That's where Direct Hit comes into play. Direct Hit, based outside of Boston, has developed a technology that scales much better than Jeeves' human-based system. The core of Direct Hit's search technology is its Popularity Engine, which automatically reviews and organizes online content by tracking the frequency and length of time that Web surfers spend at specific sites. The technology has been licensed by more than 20 customers, including some of the biggest portals like
, among others.
"At some point,
Ask Jeeves can't answer every question that someone is going to ask," says Sullivan. "This gives them the ability to provide clients with a human-based answering service and a spidering service." Spiders are bits of software that crawl the Web looking for data that can be hauled back to a database.
Quick and Dirty
The merger promises quick benefits. On the corporate side of the business, Jack Ripsteen, an analyst with
, said Jeeves will be able to offer Direct Hit's search engine alongside its question-and-answer and live-help services. "We can immediately package the two services together," Ask Jeeves CEO Robert Wrubel told
in an interview. "Really, what we're building is a huge intelligence system that companies can use to better serve their customers." Chase H&Q, which maintains a buy rating on Jeeves, has done underwriting for the company.
On the consumer side, Ripsteen says the purchase will improve Jeeves' Ask.com portal. The first benefit is that Jeeves will be able to integrate Direct Hit's search and shopping results into its database. And Jeeves says the acquisition will nearly double the reach of its consumer portal.
The merger underscores the speed of doing business on the Internet. Direct Hit was headed for its own initial public offering, having filed an S-1 with the
Securities and Exchange Commission
on Dec. 22, 1999. The two companies were brought together by investment bank
. Direct Hit had lined up Robby Stephens as lead underwriter for its IPO; and Robby Stephens is Jeeves' mergers and acquisitions adviser. Initially, the two companies were mulling a partnership but they quickly realized the benefits of getting hitched. "It was so obvious," says Wrubel.
Although Direct Hit reported only $862,000 in revenue for the nine months ended Sept. 30, 1999, Ripsteen estimates that the merger could add approximately $8 million to $10 million in revenue in 2000. Direct Hit CEO and co-founder Mike Cassidy says that number is conservative. "We're gonna blow that away," says Cassidy, who helped found the company in 1998 after taking a year off to study jazz piano at the
Berklee College of Music
Direct Hit seemed destined for success. The technology, developed by Chief Technology Officer Garry Cullis, won the grand prize in the prestigious 1998
$50K Entrepreneurship Competition. After debuting in August 1998, the technology caught on with portals, managing to take some business away from search technology leader
. Analysts expected Direct Hit's IPO to succeed, but the company's management decided it would be stronger in the long run by teaming up with Ask Jeeves.
"We had multiple choices," says Cassidy. "By hooking up with Ask Jeeves we thought we'd be one of the superstrong players."