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3/4/2004
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Ask Jeeves Plunks Down $343 Million For Interactive Search Holdings

CEO Berkowitz says he's comfortable investing the bulk of Ask Jeeves' cash reserves, as the acquisition should let the company increase advertising revenue.

Ask Jeeves Inc. and its natural-language search engine have languished in recent years as Google, Yahoo, and Microsoft forged a three-way battle for Web-search supremacy. But the once-ubiquitous butler took a major step to regaining more significance Thursday when it agreed to acquire Interactive Search Holdings Inc. for $343 million in cash and stock. The company also said it would abandon the paid-results approach that has become a staple of Web-search firms in an effort to improve the relevancy of its search findings.

Interactive Search is the parent company of several Web-search and portal brands, including My Way, My Search, My Web Search, Excite, iWon, and MaxOnline, making it one of the largest players in the search arena. Ask Jeeves is counting on the company's strength in search distribution and direct marketing to help it make a run at the dominant Web-search players by sharply increasing its advertising revenue. Ask Jeeves CEO Steve Berkowitz says he wants there to be no confusion about the strategy behind the acquisition. "The synergies aren't going to come from cost savings," he says. "This is an acquisition that's about growth."

Which is why Berkowitz feels comfortable investing the bulk of Ask Jeeves' cash reserves to make the deal happen. The company will issue 9.3 million shares of common stock and will pay $150 million in cash, plus up to another $17.5 million based on factors such as Interactive Search's operating performance. Interactive Search's family of sites recorded about 700 million searches during the fourth quarter of 2003, slightly more than the search output of Ask Jeeves. By doubling its search traffic, Ask Jeeves hopes to fuel ad sales "in a space where advertisers can't get enough inventory," Berkowitz says.

Delphi Group analyst Hadley Reynolds says the aggressive strategies of Google and Yahoo--with Microsoft not far behind--have made size critical to survival in the Web-search market. Ask Jeeves had to make a bold move to stay competitive. "Anyone who wants to stay in the game needs to be able to sell ads or provide access to advertisers that have a similar kind of scale," Reynolds says. "Whether that will mean improved service either to advertisers or to searchers, I really doubt it."

Ask Jeeves raised its revenue projections for 2004 as a result of the acquisition, which is subject to customary regulatory and shareholder approval and is expected to close by the end of June. The company, which posted revenue of $107.3 million in 2003, anticipates revenue of between $220 million and $230 million in 2004. Investors appeared to like the move, sending Ask Jeeves' stock up $7.41, or nearly 36%, to $28.12 by late afternoon.

The deal solidifies Ask Jeeves' focus on the Web-search market, and Berkowitz says the company has no intention of taking its technology to the online retail market, which is increasingly looking to implement natural-language search tools for online customer self-service. "I wouldn't want to take my eye off the ball," he says. Ask Jeeves had attempted to tackle the business-search market, forming a unit in early 2002 to sell search to companies, but when that venture failed to catch on, it was sold last May for $4.25 million to Kanisa Inc., a maker of customer self-service apps.

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