SAN FRANCISCO, March 21 -- The race to develop a better Web search engine and operate it profitably grew even more competitive Monday when media mogul Barry Diller's IAC/InterActive Corp. announced it would pay $1.85 billion in stock to acquire Ask Jeeves Inc.
Ask Jeeves, the country's fifth-most-popular search site, has differentiated itself from competitors by allowing users to pose queries as if they were asking a friend or relative. For the nearly 10 years it has existed, the company's dapper cartoon butler has stood ready, his hands on his lapels, to provide answers. Ask Jeeves has long been considered to have strong technology but has lacked the capital of a Google, Yahoo or MSN.
The home page of the Ask Jeeves search engine shows a dapper -- and evidently very knowledgeable -- Jeeves confidently clutching his lapels.
(Des Jenson -- Bloomberg News)
With the backing of Diller, who also owns travel site Expedia, online matchmaker Match.com, event sales company Ticketmaster, local guide Citysearch and many other prominent Web properties, some think the company is ready to become a more powerful player in the industry.
The purchase comes as search companies are reporting rising profits from online advertising and the licensing of their technologies. IAC, based in New York, will trade 1.2668 of its shares for one of Oakland, Calif.-based Ask Jeeves. That represents a 17 percent premium, or roughly $450 million, based on Ask Jeeves's closing price of $24.24 on Friday.
"We're convinced that all this hypergrowth is still at its beginning stage," Diller said in a conference call with industry analysts.
He said that adding Ask Jeeves to the IAC network would help create a "traffic ecosystem" in which a site will refer Web surfers to other IAC sites. For example, IAC plans to place an AskJeeves.com search box on its other sites and will specially package search results from its other properties.
"Simple search text results alone are not significant or satisfying," said Diller, who also serves on The Washington Post Co.'s board.
Added Steve Berkowitz, chief executive of Ask Jeeves: "IAC will help us realize our full potential."
Industry analysts, however, questioned Diller's strategy. A report by Banc of America Securities said Diller might be too focused on acquisitions at the expense of IAC's operations, and Safa Rashtchy, a managing director at Piper Jaffray & Co., wondered why IAC was buying a search company now, having recently been "reluctant to enter the market."
Others expressed concern about whether the consolidation will lead to more volatility in the stock.
Merrill Lynch analyst Justin Post wrote in a research report that he feels the acquisition raised some "business complexity concerns." For instance, he said, "IAC will need to maintain the integrity of Ask Jeeves search results making integration more difficult."
Another possible danger, said Youssef H. Squali, managing director of Jefferies & Co., is that he doesn't think "that this deal has been shopped around, which implies that other bidders may surface before it closes."
IAC officials said they would use cash on hand to buy back 60 percent of shares the company issues for the Ask Jeeves acquisition.
Ask Jeeves, which in addition to AskJeeves.com owns Excite.com and iWon.com and now boasts 42 million unique users each month, has been profitable for several years. In the most recent quarter, its profit and revenue more than doubled. Profit was $17.5 million, and revenue was $86.1 million. Much of its money comes from an advertising partnership with Google that runs through 2007.
The companies said they expect the transaction to close in the second or third quarter. Shortly after that, IAC hopes to spin off its online travel reservation business.
IAC shares fell nearly 3 percent, to $21.63, in trading Monday, while Ask Jeeves stock climbed about 18 percent, to $28.67.
Researcher Richard Drezen contributed to this report.