M&A Alert—May 27, 2011
Reply! Acquires MerchantCircle
Transaction Size: $60mm
MerchantCircle helps local merchants promote and manage their businesses. Services include helping local merchants build an online presence via inclusion in MerchantCircle’s “Yelp-like” online directory. Directory features include integrated blog, couponing, newsletter, consumer ratings, appointment scheduling, Q&A, photos and video. MerchantCircle also incorporates search engine optimization (“SEO”) to improve the likelihood that the local merchants’ businesses show up in Google, Yahoo!, Bing, Ask.com, Local.com and Superpages.com searches.
MerchantCircle currently provides services to 1.6 million small businesses throughout the U.S.. Founded in 2005, the company is based in Los Altos, CA. MerchantCircle has raised $14.1 million from Mayfield Fund, Norwest Venture Partners, Scale Venture Partners (Sharon Wienbar and Stacey Bishop), Rustic Canyon Partners (Mark Menell), Steamboat Ventures (Scott Hilleboe) and MentorTech Ventures (Michael Aronson).
Recently, Reply! announced a business partnership with MerchantCircle whereby MerchantCircle agreed to use Reply!’s Marketplace technology to power price quote features that their merchant customers could use to attract customers. Competitors include Yelp, CitySearch, ReachLocal, Superpages.com, Google Places and Yellow Pages.
Reply! sells, via auction, qualified sales leads to (1) large companies interested in identifying local customers as well as to (2) smaller local merchants. Reply! identifies consumers who want to purchase particular products or services by attracting these consumers via search, display advertising, owned and operated websites and email, among other techniques. Reply! then asks the consumer to provide more detailed information about their purchase interest and intent by completing an online form. That qualified lead is then auctioned off to interested companies. Reply! focuses primarily in the automotive, home improvement, insurance and real estate industries. Reply! generates over one million leads per month in each category. Last year, Reply! filed with the SEC to go public. CEO Payam Zamani was the key executive sponsor of the acquisition. Following the acquisition, Reply! will be have two business units: Reply! Marketplace: the online auction platform allowing the purchase of locally-targeted and category-specific consumers on a cost-per-lead or cost-per-click basis and Reply! Media: a portfolio of media properties that includes MerchantCircle.com, Contractors.com, Bloglines.com, iMotors.com, and other consumer-facing destinations.
Reply! is acquiring MerchantCircle for $60mm in cash and stock. The proportion of cash and stock was not disclosed.
In an unusual move for a private company, Reply! disclosed, concurrent with the acquisition announcement, that it expected revenue in excess of $100mm in calendar 2012. This represents a significant increase from the $38mm in trailing twelve month revenues through 3/31/2010 reported in their IPO filing.
Reply! generates revenues by identifying customers who have a desire to purchase local goods and services and selling those leads to businesses with an interest in that customer. Currently, Reply! generates a large proportion of those leads by purchasing search terms or by placing (purchasing) ads on various websites in an effort to attract these consumers. In other words Reply! has to find these consumers at a lower cost than it can sell the leads to interested merchants.
MerchantCircle is strategic to Reply! as it brings 25mm monthly unique consumers who are actively seeking goods and services from local merchants. It also brings 1.6mm merchant relationships who are keenly interested in attracting and retaining customers. Reply! gets both 1) consumers who are qualified leads AND 2) new merchants to buy these qualified leads.
Architect Partners’ Observations
The key to Reply!’s business is identifying consumers who have purchase intent at a cost that is materially less than what that lead is worth to a business with interest in selling to that customer. Owning and operating sites like MerchantCircle, which inherently attract local consumers and businesses who seek to serve them, makes perfect sense.
Reply!’s IPO filing was in June 2010 which indicates to us that the process has been delayed beyond original expectations. Practically, this transaction will further delay the IPO process although likely provides a stronger base business with which to attract public investors.