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What the iCrossing Acquisition of Proxicom Says About the State of the SEM Industry




Today iCrossing, possibly the largest SEM firm, announced its acquisition of web development firm Proxicom. The acquisition came on the heels of an announcement last week by iCrossing that it had received $62 million in funding from Goldman Sachs and three venture capital firms. This acquisition is just the latest in a string of purchases by iCrossing this year and last, including: ewGate Internet, a paid-search firm in San Francisco; Spannerworks, a search and social-media agency in the United Kingdom; and Sharp Analytics, a marketing technology firm in Salt Lake City.

iCrossing’s acquisition of Proxicom is a watershed moment in the SEM industry. To date, most SEM firms have been acquired by marketing services or web agencies, but this is the first case where a major SEM firm acquired a major web development firm. Why is that important?

iCrossing is one of the leading SEM firms in the US if not the world. With that being said, however, the Inc. 500 listed their 2005 revenue at only $31.3 million and a staff of 215 people — relatively small by large ad agency standards. The Inc. 500 bases its rankings on companies’ 3-year revenue growth, and the 2005 3-year revenue growth for iCrossing was at 506.4%. Pretty impressive. That means that in 2002, iCrossing likely realized only approximately $5-$6 million. So why would a company on such a hot streak decide to part with its money and invest in a web development company? The answer: The SEM market is shrinking.

Ok, I know you may think I’m crazy — but hear me out. The main reason that a company acquires another company is to increase company value. Period. If an acquisition does not promise to increase value and show a return on investment, then why do it? In a services industry, like the SEM services industry, company value may be measured in a number of ways, including: a) total company revenues, b) backlog, c) assets (including process and other intellectual property) and d) sales potential.

While $31.3 million is an impressive revenue figure for an SEM firm, just the acquisition of Proxicom now brings iCrossing’s total revenues to over $100 million — a 219% increase in company revenue overnight. Proxicom also brings a backlog of web development projects with its major brands, including Toyota, Chevron and others.

The acquisition also opens the door for iCrossing with new sales potential. Already the search marketing firm for General Motors, the acquisition squarely places iCrossing in front of Proxicom’s major automotive clientele, not the least of which includes Toyota. I personally think that, in addition to the new revenue influx, iCrossing acquired Proxicom because it realizes that the SEM market is shrinking in the large-scale accounts. While there are a few major players, including iProspect and iCrossing, most large-scale companies today are already participating in SEM in multiple ways, either in-house or through an agency — there are not many, if any, large-scale companies who do not realize the value of SEM today. I don’t think iCrossing was able to penetrate new, large-scale accounts at the same rate as its glory days from 2002-2004 and has begun to realize that it needs a way to a) infiltrate large-scale companies and b) become an interactive agency of record for these accounts. By accomplishing those two goals, iCrossing then will be able to increase revenue AND establish a nearly guaranteed backlog — increasing its company value overall.

What’s next for iCrossing? I personally expect an IPO. Because the main funders behind this acquisition are venture capitalists, they’ll want to recognize a return on investment as soon as they can. And I also expect that the founders of iCrossing will want to cash in as well as the SEM market not unlike the web design and development market, becomes more commoditized over time.

My next post this week will continue this theme and discuss what SEM businesses should be considering for their futures now that this acquisition announcement has been made.

  • Adam C

    “The SEM market is shrinking” is not the same as “the rate of growth in the SEM market is slowing”. I feel the second statement is the far more realistic of the two. In my experience demand is as high as ever. Most large companies are engaged in search marketing, though many change agencies and move back to agencies when in-house projects don’t live up to expectation.

    Having a web dev agency as part of the group gives great cross selling potential and brings a competitive edge that pure SEM agency or pure web dev doesn’t have.

  • http://www.capecodseo.com/ Derek

    Interesting points. I’ve never worked for a larger agency but my sense would be more along the lines of Adam’s statement that the rate of growth in the SEM market is slowing – specifically for a company of that size. There are only so many “big fish” that (I would have to imagine) ICrossing would work with – but that’s my own speculation.

    That being said, perhaps the investment in, and rate of acquisitions, by ICrossing’s signifies that Search Engine Marketing is really being recognized as an integral part of a company’s marketing strategy.

    I feel that as search engines improve how they index and rank pages, more and more companies interested in hiring an SEM firm will need/expect a more well-rounded suite of services (or at least the potential for those services) from their vendor – which means that either the SEM shop gets acquired by the larger agency or (in this case) the SEM shop has the resources to add to their own portfolio of offerings.

  • http://www.marketingpilgrim.com Andy Beal

    Great analysis Janet. When I left WebSourced in 2005, I predicted we’d start to see consolidation within 2 years. @ Adam – perhaps the best phrase is – the growth of SEM is shrinking. ;-)

  • http://www.thinkseer.com/blog Wil Reynolds

    I have been feeling this too. I have a friend who works at a big ad agency who was managing one of the large accounts for an automaker, and he tried and tried to get us in, but the VERY large agency in one of those big groups like WPP, had recently bought a search firm. I think the BIG guys are realizing that their 30+ agencies are individually sending out search work to many different companies and just said, we’re going to buy ONE!

    This works for the Search agency because they have to be feeling the squeeze on SEM growth now that people are becoming more educated and more likely to bring this stuff in house.

    Good post, thanks!

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  • Meg

    interesting analysis, but the numbers are a bit misleading — in that you’re taking iCrossing’s 2005’s revenue total ($31M) and then calculating a 219% increase “overnight”. What happened to 2006?

  • http://www.search-mojo.com Janet Driscoll Miller

    Meg, good point. I’m not sure what their 2006 revenue is, and because they are private, they are not required to file that number publicly.

    If we assume, however, that a growing business on the track that iCrossing has been on would have at minimum maintained it’s 2005 revenue in 2006, if not gained, then it’s not misleading necessarily, but rather futher proves the point at hand — SEM growth in large scale accounts is flat.

    Remember that Goldman Sachs and others gave iCrossing $62M for this acquisition to happen. And it would be highly unlikely that Proxicom, a financially solvent business, would sell the company for a dollar figure less than it’s annual revenue figure.

    $100M (new combined revenue) – $62M (GS funding) = $38M. $38M is what iCrossing had to come up with to buy Proxicom. Assuming that iCrossing did not spend its last dime to acquire, then yes, they would have some growth from 2005 to 2006. But likely it was not much, considering that the new combined revenue is $100M. In fact, I might argue that the growth appears that it could have been SO flat that this acquisition was necessary to boost the revenue for 2007 after a year of no growth.

  • Bubalu

    AdAge’s annual agency report puts iCrossing’s 2006 revs at $63M. Remember, all those companies they bought are producing new revenue. Granted, I think those numbers are guesses on Adage’s part.

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  • Ryan

    Meg & Janet it isn’t fair to assume that the purchase price required the entire $62M, in fact the article that you link to from azcentral.com suggests that only a portion of the $62M raised primarily from Goldman Sachs was used to complete the transaction.

    It is difficult to discerne how much revene is generated from Proxicom versus iCrossing. There have been three other transactions since December, all of which added incremental revenue to the published 2005 number.

    The combined entity now is at a point where the total revenue between 4 additional companies (including Proxicom) and iCrossing generate a total of $100M in annual revenue.

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  • http://www.theseoagency.com Tim Lang

    I agree that the SEM Markets have become tighter but due to increased level of specialty SEM companies. I was with ic early and can say that they are smart to buy firms and then cultivate relationships, but ultimatley sell big. In the last three years competition has grown considerably as with In-House SEM teams trained by Google or related firms.

    It is mainly competitive saturation but also web development and SEO should be combined as they remain largly seperated.
    I do, in my opinion, think their sales efforts were and are not strong and for their competitors it is NOW time to attack their markets while they work to combine interactions of companies they aquired.

    If specialty SEO companies see this as there chance to compete for the ic markets, then these aquisitions might only turn out to be subsistence in the long run.

    iRecon

  • Sam

    Basing any analysis on revenue numbers that are 2 years old is just plain bad analysis. I understand that you only had limited information, but maybe in the very least you should have projected iCrossing’s current revenue at their historic growth rates. In the SEM industry, 2007 is very different from 2005.

  • Proxi Person

    Proxicom annual revenue for 2006 was around 46 million. Good article, and lots of good analysis.

    iCrossing will definitely make money as a result of this purchase. But I question the longterm growth for corporate cultural reasons.”Cross-Sell” is quite literally the company mantra (they even have to chant it!really!) and lets not forget that Herzog started out as a Banker.

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