Answers Has a Way With Words

It's not a ginormous deal. But then again, we may as well call it that, since "ginormous" is now officially in the dictionary. And Answers.com (Nasdaq: ANSW  ) ? It's officially in dictionary.com. Answers is acquiring Lexico -- the parent of Dictionary.com, Thesaurus.com, and Reference.com -- in an all-cash $100 million deal.

Maybe you've turned to Dictionary.com when you needed a term defined, or found yourself juggling dueling spelling variations for a certain word. Lexico's other sites are there if you're fishing for alternate words or need an online encyclopedia.

Unfortunately, there probably weren't a lot of people following suit with your old-school reference-hunting ways. Despite the rich, type-in nature of Lexico's portfolio, the company only milked $7 million in revenue from its Web traffic last year.

Lexico's margins are huge, thankfully enough. Posting a profit of $2.8 million last year gave it net profit margins of a whopping 40%. However, that only softens the sting of Answers paying 14 times last year's revenue for the company.

Still, Lexico's generic names are a blessing. The company derives 85% of its traffic either from type-in users or by ranking organically high on search engines for tricky words. But we're living in changing times.

These days, leading search engines like Yahoo! (Nasdaq: YHOO  ) and Google (Nasdaq: GOOG  ) will auto-complete popular search terms, or suggest more commonly used words if you mistype. Wikipedia, which Answers knows all too well (since it typically scrapes the site for Answers.com content), is the typically ranks the highest on search engines for obscure reference terms.

Perhaps the most unusual thing about this deal is how it seems as if Answers is buying its slightly better-looking doppelganger. Both companies rang up just $7 million in revenue last year. Answers commands about a $100 million market cap, and it's shelling out $100 million for Lexico. In a nutshell, Answers is doubling in size with the deal. The difference is that Lexico is deliciously profitable. Answers has struggled to turn a profit over the past few years. It did close out the first quarter in the black (when adjusted), but it will likely post a loss in the second quarter before resuming its refreshingly profitable ways. Lexico's rich margins will help, no doubt.

And help is something that Answers needs right now. The company is warning that it will post roughly $2.8 million in revenue for the second quarter. Its original guidance called for a showing of as much as $3.2 million. To most companies, $400,000 may seem like pocket change, but we're talking about a 13% downward revision since May.

Okay, so maybe this deal isn't exactly ginormous, by freshly defined standards. Desperate? Convenient timing? Accretive? Those are better terms to describe a deal that makes sense on paper, if only because it makes Answers' lofty valuation a little more digestible.

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Longtime Fool contributor Rick Munarriz can't remember the last time that he cracked open an actual dictionary. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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