Trends Report – A Polished Sneaker

Last week, I lamented the fact that no major acquisitions occurred. No sooner had those thoughts left the keypad then news of ClassesUSA’s sale to Experian became public. While Rupert Murdoch’s entry into the online space made headlines, once again, Experian and their newly formed Experian Interactive barely caused a ripple when acquiring a well-known player in the space. This week’s Trends Report plays like a tale of two companies, both are credit bureaus and both have made acquisitions in the space. One has succeeded and continues to buy. The other, made only one gamble, and did not see success. That company was Equifax, and the story of its $135 million Naviant acquisition is the focus for this week’s Trends Report.

Naviant began its life and focus in the offline world as part of MRJ Technology Solutions, a company that in the late 1990’s worked in data mining for government intelligence agencies. Thanks to a $2 million venture cash infusion, Naviant spun off from the parent company to focus on data mining for private sector clients. Under the name Naviant Technology Solutions, it offered tools to perform complex analytics on existing data to increase per-customer yield, e.g. helping a bank know which customers to target for a new product offering. Shortly after its launch, the company broadened their scope and focused on competing in the larger space of customer relationship management and set its sites on being a software and consulting services company.

Like many companies during the late 1990’s, Naviant Technology Solutions decided to enter the online arena. They did this in 1999, with the acquisition IQ2.net for $46 million and dropped the “Technology Solutions” to become just Naviant. Until the merger, Naviant’s strengths lay only in analyzing in-house data. They did not have expertise in data acquisition. That is precisely where IQ2.net’s strengths existed, and their angle was a fantastic one. Finding quality email addresses always was and still is a big challenge. IQ2.net partnered with original equipment manufacturers (such as Dell) to enable online product registration. At that time, most product registrations were handled offline and as a result a lot of breakage occurred. IQ2 pitched companies a means to accept online registration without any development costs. As part of the deal gave, IQ2 received access to the customers who registered and rights to market to them on a revenue share basis. And what data it was. These were all customers who had just purchased an, often expensive, product and logically supplied extremely accurate information as the warranty depended on it.

Others too saw merger of an acquisition and analysis company, because a laundry list of companies helped Naviant finance the almost $50 million deal. This worked well too for IQ2.net’s parent company Intelliquest who needed the money and wanted to divest of division that operated outside of the core competencies of the parent. All told, seven investors contributed $70 million to the deal, $24 million more than the price tag. The investors included TL Ventures, which is affiliated with Safeguard Scientifics Inc., General Electric Co.’s GE Equity subsidiary, First Union Corp.’s First Union Capital Partners subsidiary, 24/7 Media, and At Home Corp., better known then as Excite@Home. Combined, the two companies had a database of 15 million of some of the best quality names and complete solutions for both acquiring and extracting value out of the names.

The new company had money and an appetite for deals. In March 2000 they purchased Softbank Marketing Solutions, a division of famed investment house Softbank Corp. for $25 million in stock. A week before they also bought Strategic Database Group, and one day after announcing the Softbank acquisition, Naviant filed for an initial public offering in which they sought to raise what is by today’s accounts a modest $50 million. In April the company received $15 million from Young & Roubicam. Their deal making trend continued into 2001 when in June they raised $15 million more from some of the original investors. With the downturn in Internet advertising starting to occur, the company decided in December to withdraw its IPO and merge with email marketing machine, eDirect, moving from a Philadelphia suburb to the email capital of the world, Boca.

With 60 million names in-house, the merged company, which went by the name Naviant, had for all intents and purposes, officially become an email company. In addition to revenues from sends, the companies also expected to generate revenues from the then emerging email append business, i.e. connecting an email address to a list owner’s physical address. Even after the merger, the new company continued acquiring. In February 2002, just two months later, they acquired a small shop named Data One Acquisition. A few months after that they picked up Sweepsclub.com, a move designed to launch Naviant / eDirect into the performance marketing space. And in a move to increase reach, the company purchased a majority stake in 24/7 Media’s mail division – a deal that gave the company a combined 100 million unique email records, 38 million postal records, and on paper a chance to take on, then data and email player, Doubleclick.

By mid-2002, all the pieces were in place to make Naviant a player in the Internet marketing space, and according to sources at the time, their revenues were in place too, as they were earning more than $100 annualized during that time period. With such large reach, a background in offline data mining, and real revenues, it made sense that Equifax, a company used to managing, mining, and making money off user data would have an interest. And, they did, purchasing the company for $135 million in August 2002. This story, however, does not have a happy ending. Just over a year later, in December 2003, Equifax shut down their email marketing division, consolidating offices and laying off people. They blamed the closure on the upcoming spam laws and unpredictability of email marketing, ultimately taking a $23 million dollar loss on their balance sheet.

Equifax’s entry online is a lesson for all of us as we evaluate acquisitions and strategies, and it ties back to last week’s article on the secret CEO handbook. Naviant had on the surface all of the right pieces, but the company as it stood in late 2002 was really a polished sneaker. The core assets that prompted the sale did not align with the drivers of revenue. It was only a matter of time before the true underlying drivers caused cracks to show in the once polished surface. The company placed too much of its bets on the short term and did not invest in alternate revenue strategies. By the time the writing for email was on the wall, the company was too set in its ways with too many different division too change its course. Like the Titanic, they probably thought they had enough data to weather any storm. They didn’t realize that it’s not about how big the file is but how it is used.