aQuantive Fills Out Agency Offering With Razorfish Buy

aQuantive’s purchase of SBI.Razorfish—its third acquisition in eight months and the largest in its seven-year history—will more than double aQuantive’s size and, more important, equip it with a substantial Web-site-marketing offering.

The Seattle-based interactive-services holding company, with $64 million in revenue and 455 employees at the end of 2003, is known for its media prowess thanks to its Avenue A division. With the $160 million acquisition of Razorfish, it hopes to fill a void that previously proved advantageous to peers such as Digitas.

“A lot of Avenue A’s competitors also do Web-site design,” said Brian McAndrews, president and CEO of aQuantive, which also owns Atlas DMT and i-Frontier. “It’s important for us to have that full range of capabilities offensively but also defensively. I think we have a better shot of retaining clients the more we’re doing with them and the more strategic our relationship with them.”

“They were a leading media-buying agency, and Razorfish’s expertise is in Web-site marketing,” added Stewart Barry, a senior analyst at Think Equity Partners in San Francisco. “So now, they not only are creating customers for their clients, but they’re managing the customer relationship on an ongoing basis.”

SBI.Razorfish is more accustomed to being a buyer than a seller. The Salt Lake City-based i-shop, formerly SBI and Co., has grown to 500 people and 2003 revenue of $93 million through acquisitions of troubled dot-coms, starting with some assets of marchFirst in June 2001, followed by Scient and Lante in 2002 and culminating with Razorfish in March 2003.

“It’s not that we went off to sell, it’s that we went off to add complementary services, and the outcome was a sale,” said Darin Brown, evp at SBI.Razorfish, which started talking to aQuantive and others this spring.

The deal, expected to close in late July, calls for aQuantive to pay $85 million in cash and $75 million in convertible notes.

aQuantive paid more than 11 times what research firm Roth Capital Partners expects SBI.Razorfish to post in EBITDA (earnings before interest, taxes, depreciation and amortization) next year ($14 million) and 1.4 times projected 2005 revenue ($112.5 million). When viewed against its rivals and historical valuations, the price appears high by some measures and in line by others, wrote Roth analyst Richard Ingrassia.

Following the announcement of the deal on June 28, aQuantive’s stock slid from around $11 a share to settle near $9 last week. The reaction, analysts said, may be due in part to the SBI.Razorfish’s lower margins.

aQuantive will combine SBI.Razorfish with Avenue A, rebranding it Avenue A/Razorfish. The deal brings with it clients such as Ford Motor Co. and Kraft Foods and is expected to add $41-43 million in revenue and $3-4 million in EBITDA to aQuantive’s financial results this year.

aQuantive’s recent small acquisitions included Go Toast in December and NetConversions in February. Why a large investment now? “To be honest, because it was available,” McAndrews said. “Did we need this today? No. Could our business continue to grow significantly? Yes. But this was a capability that we felt we were eventually going to need in a larger way that we currently had.”