Last week, eBay (NASDAQ:EBAY) agreed to shell out $620 million in cash for Shopping.com, a leading online comparison-shopping site.
It must be contagious. Yesterday, E.W. Scripps (NYSE:SSP) announced that it is writing a $525 million check for Shopzilla, another major destination for online comparison shopping.
Why the interest in the space? Well, comparison shopping is growing fast. A company like eBay, which is experiencing slower growth, sees Shopping.com as a way to ramp things up. The same goes for Scripps.
But is Scripps' move an example of a traditional media company getting tempted into the online world, but ending up with a bad deal? That's probably not the case here. By all accounts, Shopzilla is a very well-run company. Revenues for 2005 are projected at $130 million to $140 million, with profits of $30 million to $33 million.
Shopzilla's business works this way: Suppose you want to purchase a digital camera. You go to a Shopzilla marketing partner, such as Google (NASDAQ:GOOG), Yahoo! (NASDAQ:YHOO), or Time Warner's (NYSE:TWX) AOL, to search on the term. You click on a Shopzilla.com ad and land on its website, where you'll see a list of digital cameras with a tremendous amount of information on features and pricing. This information is based on a highly sophisticated proprietary ranking technology that organizes data on more than 30 million products and 55,000 retailers.
If you buy a product, Shopzilla gets a referral fee, and advertisers know about it. Customers get access to quality products at good prices, and merchants get a steady supply of customers.
Scripps found this process very appealing, given that its mission is to get customers for its advertisers. Until now, it did so mostly through traditional advertising on its cable and newspaper properties.
But Scripps can also bring value to the table. It has tremendous experience in building brands, such as Food Network and HGTV. The company intends to apply the same brand-building techniques to Shopzilla.
Risks? A major challenge will be melding two cultures. Sure, there are clear synergies. But can the online world and traditional media mix? After all, qualifying ad spend in online advertising involves a much more linear/direct linkage, where traditional media venues face differing challenges in making such determinations.
Of course, on the conference call, the CEO of Scripps indicated that both companies have worked well together and create synergies. In fact, they have had an alliance for about a year. What the synergies may be, the CEO did not reveal. In fact, he was mostly vague on the subject. His PowerPoint presentation consisted of only two slides. (The slides were colorful, anyway.)
Also critical is that Shopzilla will remain as a separate division, with its two founders as its leaders. In fact, the entire senior management team will stay in place.
True, the deal is expensive, since it will be dilutive to earnings for 2005. (It will be accretive next year, though.) To justify the deal, Scripps management will need to provide much more detail on the mysterious synergies. And even though both sides have worked together for the past year, it is much different when one company actually owns another. Basically, the key will be establishing cultural harmony, something that has been extremely tough with traditional/online combinations. Remember AOL Time Warner? Investors, steer clear for the time being.
Time Warner is a Motley Fool Stock Advisor recommendation.
Fool contributor Tom Taulli does not own shares of companies mentioned in this story.
