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.