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Tips for Internet Company Sellers
Based on a Case Study of Evite

Here are several tips for sellers of Internet companies culled from the case study of Evite below:

  • Start very early to seek strategic alternatives.
  • Cut cash burn immediately and dramatically.
  • Identify the core value-creating element of the business and pare back to It.
  • If acquisition is the strategy, start early to identify prospects.
  • Competition fosters better prices; try to get at least one buyer interested and then start contacting others.
  • If the property is broad-based, reach broadly to prospective buyers.
  • Find an intermediary with a broad contact base and deep understanding of your business.
  • Get to know your friendly neighborhood I-banker now.

EVITE CASE STUDY: Early and Loudly to Market

Evite, Inc. last autumn became one of the first dot coms to turn its "for sale" sign into a national news event. And last week Evite's broadcast strategy paid off when Ticketmaster (Nasdaq: TMCS) said it would acquire the company.

Evite founders and funders see the sale as welcome news in what they describe as a 'brutal' market, even though the price tag, rumored in news reports to be less than $25 million, was almost certainly well below the $38 million that investors had sunk into the startup. Key to whatever success they can claim, Evite principals say, was the decision to act early, decisively - and loudly.

The Slash and Broadcast Strategy

Last November, as Silicon Valley began to echo with the crisp snick of investor purses snapping shut, Evite CEO Josh Silverman took quick action. Even though Evite still had $17 million in the bank, Silverman slashed 60 percent of staff and hired investment bank Chase H&Q (now part of J.P. Morgan Chase & Co.) to shop the company. And then, in a move fairly unprecedented in investment banking circles and somewhat to the chagrin of his bankers, Silverman decided to broadcast his message to the hills. "I picked up the telephone and made ten calls to reporters telling them, 'I have breaking news for you, Evite is for sale' " Silverman said. Several reporters indeed picked up the story and the Evite phones began to ring.

Flushing Out Buyers and Creating Urgency

Silverman went public with the sale despite fears that a public announcement would put downward pressure on the selling price. "There were two things we could do," Silverman said. "One, we could have the bankers call and pitch each prospect and spend a lot of time trying to get in front of people who fundamentally aren't that interested." His other choice, he said, was to take the more public route.

Silverman chose to put out a broadcast in part because he felt it would be difficult to predict just who might be interested. "You don't know what's on the white boards of all these companies out there," Silverman said, pointing out that Evite's offering was attractive to a broad and hard-to-pinpoint field of potential buyers. "My sense also was that we needed to create a sense of urgency," he said.

Evite funders agreed with Silverman. "There was no downside to the approach," said Andrew Anker, a general partner of August Capital, the venture firm that put $7 million or $8 million into Evite, joining investors such as Greylock Management and Hambrecht & Quist's Access Technology Partners. "We meant to sell and we were just trying to ferret out if there were any buyers. We didn't want to pretend otherwise."

Both Anker and Silverman believe the broadcast strategy helped Evite attract several of the seven or eight serious prospects - a number that eventually boiled down to three hard-core bidders. "There's no question at all, it brought in a number of new prospects," said Anker. "One e-commerce prospect that came out the woodwork", Silverman said, "was a company that I wouldn't have picked to be in the top twenty acquirers." But, he added, "When they told me what is working to drive revenue for them it became clear why Evite was perfect for them." Another buyer that emerged was an international buyer that was seeking both the Evite product and Evite's San Francisco-based operations team as a Silicon Valley development beachhead.

Paring Back to the Core Value Engine

Evite insiders also believe that early and aggressive cost-cutting was key to making the company saleable. Before deciding to seek a buyer, the company had been deploying dozens of developers on several ancillary projects, including sourcing content such as restaurant reviews and developing "B2B2C" capabilities. Silverman halted all new development and focused his remaining 27 staffers on refining the core application and trimming costs in such areas as customer support. The resulting programming cleanup brought about a 40 percent increase in performance.

Cutbacks more importantly whittled back cash burn rates, which are a particularly deadly poison pill for today's buyers. Not only was a stripped-down Evite able to bring about $15 million in remaining cash to the table, according to Webmergers estimates, but it also stripped away bells and whistles that, in the case of Ticketmaster, the buyer didn't want anyway.

Also, Silverman said, with cash burn under control, the company's advertising-based revenue model began looking more viable. Boasting such financially stable advertisers as Heineken and Palm and an ability to reach such rich prospect lists as individuals being invited to housewarmings or baby showers, Evite has been able to sustain an average CPM rate of $20.

The Fit With Ticketmaster

Evite appears to have found an ideal home at Ticketmaster, in particular with its CitySearch regional directory service. "It's a perfect fit," said Mary McAboy, Ticketmaster's vice president of investor relations. "Ticketmaster is about where to go and what to do and Evite gives you an easy way to invite others to go along."

Ticketmaster has made about ten acquisitions since 1999 and McAboy predicted the company will find more ways to buy, rather than build, extensions of its product lines. "There's been a lot of great work done in building franchises," she said, "Evite is a good example of that." For example, McAboy said, the company's $22 million January acquisition of ReserveAmerica, a camping reservations service that had a nearly identical business model to Ticketmaster's was "a perfect fit for our strategy." Los Angeles-based Ticketmaster is majority owned by USA Networks, Inc.

Show-Me-the-Money Buyers

A year ago, Evite's valuation might have been based on page views or other new-economy measures then in vogue, but in today's tough climate it focused solely around old-fashioned revenues and how they could be accretive to the buyer's earnings. "Buyers just want to see what revenue you did last month.", Silverman said. "This market is so bad that demonstrating that deal is accretive is a necessary requirement just for getting in the door," he continued. "And even if the financial case can be made," he said, "acquirers are often reluctant to make a deal simply because they fear punishment from Internet-wary investors. There's a big hurdle of 'do I want to announce to the world that I just bought an Internet media company'", he said. In the case of Ticketmaster, the stock market has modestly rewarded both the Evite and ReserveAmerica deals.

In a Brutal Market, Competition is the Mother of Liquidity

"It's a brutal market to go do deals in," said Silverman. Anker agreed. "Look, it's a buyer's market right now," he said. "What we hear over and over again when we talk to buyers is 'there are 200 other dot coms talking to us [about being acquired]. Tell us why we should talk to you... Buyers are thinking you're probably going to go bankrupt, so why spend millions now to buy when you can spend tens of thousands of dollars to buy you in bankruptcy court?"

"Evite was in a position of strength relative to most dot coms," said Anker, in part because its cash reserves gave it "the ability to just say no and walk away." Equally importantly, he said, was Evite's ability to gin up multiple bidders. "If you can't get at least two buyers interested," he said, "you just end up playing some game of chicken and it's really just a question of the buyer just writing the terms and you taking them. If you have an interested buyer, it's much easier to go create more interest around that," he said, adding, "Companies don't get sold, they get bought, especially in this market. The reality is that going out hat in hand is close to impossible in this market... It's not to say don't try it, but just be realistic."

And Oh, Start Early

One constantly repeated lesson from Evite's case is the value of starting early to seek buyers." Deals take a month or two months to negotiate," said Anker. "Once you've found the likely set of buyers, you've still got two to three months of dealing to do."

Silverman also emphasizes the need to find intermediaries that have a deep understanding of the marketplace. "The ability to pitch you effectively is a hard thing to get out of a banker that's been working with you for a week," he said. Silverman urges entrepreneurs to get to know a few investment bankers early on, as he did, so that when the time comes to sell there's an existing base of understanding.

From the Web M&A Update, Volume III, Issue 50, March 13, 2001.



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