Dot.com uses sale as alternative to IPO

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Just two months after it said it would go public, Baltimore-based Advertising.com Inc. has agreed to sell itself to Time Warner Inc.’s America Online Internet unit for $435 million.

Scott A Ferber, CEO of Advertising.com, says the company decided to seek capital from its sale to Time Warner rather than proceed with an IPO.

The all-cash offer — noteworthy because it is America Online’s first major purchase since its merger with Time Warner in mid-2000 — would keep Advertising.com in its South Baltimore offices as an independently run unit. Although the company registered for an initial public offering in April, Chief Executive Scott A. Ferber said the sale was the quickest way to continue to grow. “At the end of the day the [initial public offering] was a way to seek access to capital,” he said in a conference call yesterday. “But being a key partner with America Online is a much better way to get bigger faster.”The company buys Internet advertising space in bulk to place ads for its clients. Unlike other models that charge for the space, Advertising.com is paid only if a user responds favorably to the advertisement by ordering a product, registering at a Web site or requesting further information. “We charge them every time we deliver a customer,” said Ferber, who founded the company in 1997 with his brother, John B. Ferber.The unique approach to the otherwise difficult-to-measure business of online advertising, called pay-for-performance, made the company the industry’s largest third-party advertiser. It registered $132 million in sales last year, earning $12.1 million in operating income.The company will report to America Online Media Networks President Michael J. Kelly. It has more than 300 workers, mostly in the United States, although it has operations in Europe.By selling itself to Time Warner, Advertising.com has joined an online giant. America Online had $2.19 billion in sales last quarter.For America Online, the purchase gives it a leader in an industry expected to be worth $6.78 billion this year, according a forecast by Robert Coen, a senior vice president at Universal McCann. Internet ad spending increased faster than any other medium in the United States, gaining 29 percent in the first quarter, he said.America Online’s advertising revenue may rise for the first time in 11 quarters in the three months ended June 30, gaining 5 percent to about $184 million, Rich Greenfield, an analyst at Fulcrum Global Partners in New York, said in a research note. “Online advertising is back,” said Jonathan Miller, America Online’s chief executive officer, in a conference call with reporters. “The past two years have seen a rebirth of online advertising. Major advertisers are coming more and more to the Web.”Advertising.com works with about 800 advertisers and 1,500 publishers. The company’s clients include the Associated Press, Clear Channel Communications Inc. and Time Warner’s HBO channel, according to its Web site.Aside from earning fees based on the success of ads, the company helps advertisers plan, track and adjust their campaigns based on consumer reaction.“This is a smart acquisition, in our view, as it moves America Online deeper into the pay-for-performance area,” Michael Gallant, an analyst at CIBC World Markets in New York, said in a research note to investors. That is “the fastest-growing area of online advertising besides paid search,” he said.Since becoming Time Warner chief executive two years ago, Richard Parsons has cut costs at America Online. That has helped boost the unit’s operating profit by 43 percent to $277 million in the first quarter. In May, he said he was turning his focus to growing the world’s largest Internet access company.“We believe it sends a very important signal regarding management’s willingness to invest in the America Online business, especially the high-growth, high-margin advertising segment,” Jessica Reif Cohen, an analyst with Merrill Lynch & Co, said of the purchase in a note to clients. America Online, which has 24 million subscribers, remains the subject of a U.S. investigation of its accounting for past advertising sales.Shares of Time Warner, owner of the Warner Bros. film studio and Time magazine, rose 4 cents, or 0.23 percent, to $17.39 in New York Stock Exchange trading yesterday.Information from Bloomberg was used in this report.