America Online Inc. announced yesterday that it will pay $435 million to acquire a little-known Baltimore company that deals in Internet advertising, making multimillionaires out of the two Owings Mills brothers who developed the company from an online racing game that one of them invented while in college.
In a deal expected to be completed this summer, Advertising.com Inc. gets to use the AOL brand name, keep its current clients and expand its reach while remaining headquartered in Baltimore.
Each of the Ferber brothers - John, 30, and Scott, 35 - is expected to make about $72 million from the transaction. They will continue to lead the 6-year-old company.
Along with the much-publicized public stock offering of Internet search engine Google, the sale is expected to help rekindle interest in technology investment, which swooned after dot-com stocks plummeted four years ago.
The sale also ends Advertising.com's own plans, announced earlier, to become a publicly traded company. The price of the cash deal is 36 times the company's profit last year.
"It's a dream come true," said John Ferber, the company's chief product officer and considered its creative mind.
"It really came down to how can we become bigger faster," said Scott Ferber, chief executive officer of the company, which counts HBO and Hallmark Cards Inc. among its 800 clients.
Advertising.com's ads are published on more than 1,500 sites and reach about 70 percent of all U.S. Internet users.
The company was named the top Internet advertiser in a May study by comScore Media Metrix; AOL came in 31st.
The acquisition should propel the growth of the relatively small company, although officials aren't ready to say yet how many employees it might add.
Based in Locust Point
Based in the city's Locust Point, in a former soap factory turned into high-tech offices, Advertising.com has about 175 employees in Baltimore. It employs 125 more in 11 offices across the United States and Europe, from San Francisco to Sweden.
AOL's original business has faltered, as Internet users have moved from dial-up service to a variety of broadband providers. The Dulles, Va.-based company sees advertising as a sustained engine for Internet commerce. AOL had invested $5 million in Advertising.com in 2000.
"It's very much more of a truly strategic acquisition," Michael J. Kelly, president of AOL media networks, said yesterday morning during a conference call with journalists. "We intend to go forward very competitively and play big across the board. This acquisition says that in no uncertain terms."
Big AOL losses
The deal is AOL's largest venture since its ill-fated merger with media giant Time Warner Inc. in 2001. AOL posted the largest annual loss in U.S. business history a year ago when it bled $98.7 billion. Time Warner dropped AOL from its corporate title.
"The primary source of revenues for AOL is subscription fees," said James C. Goss, a media analyst with Barrington Research Associates Inc. in Chicago. "Advertising, obviously, is an important part of the business of AOL - they'd like it to be more important."
AOL already sells a sizable amount of advertising, mainly through two sources: search engine results powered by Google and fixed ad space on its various Web sites.
In 2000, AOL accounted for nearly half of all online advertising revenue, but "they haven't been up to that level since," said Denise Garcia, an advertising analyst with Gartner Inc., a research firm in Connecticut.
Advertising.com's specialty is a growing form of the medium called "pay for performance." An advertiser pays for the ad only if it achieves certain agreed-upon results. That type of advertising increased revenue by 16 percent last year, Garcia said.
Advertising.com, which nearly doubled its revenue last year to $132 million from the previous year, buys unused ad space in bulk, then resells it.
Advertising.com charges a "cost per action" fee, which means that an advertiser pays only if it gets the desired results, such as if a product is bought or a sweepstakes entry is filled out.
The company created technology to measure the success of an ad placement, track how well it does and adjust future placement. The method carried the company through the travails of the fledgling Internet industry and helped it turn a profit of more than $12 million last year.
Seeds for the company were planted in 1996, after John Ferber graduated from Towson University. While in college, he had developed an online racing game - HoverRace - but he couldn't get people to pay to play it.
"It really grew out of struggle and frustration," John Ferber said yesterday. "We weren't making any money out of the game, so I thought, what about advertising?"
The Internet was still a new concept then for most people. Persuading businesses to invest was a tough sell at first. But Ferber realized he had something when, at age 23, he was offered $50,000 for access to his technology.
Soon, his brother Scott left his information-based marketing job with Capital One Financial Corp. to devise a business plan. It would become the basis for their philosophy: a way to deliver the most bang for an advertiser's buck through scientific analysis of an ad's success.
"Wouldn't that be the 'tool of all time?'" John Ferber remarked at the time. They nicknamed the project TOAT.
Their company was launched in 1998, and it had its troubles.
In 2001, the Ferbers laid off 72 of 287 employees at a time when Internet companies in Baltimore's harborside tech corridor were folding all around them.
Low and high
"That was a low, that was the toughest day of all of our lives," John Ferber said. "It was a challenge and definitely painful, but we did what we had to do."
That low was one reason yesterday's high was especially sweet, said Don Kennedy, Advertising.com's vice president in charge of ad sales. He found out about the acquisition while standing in his kitchen yesterday when he received an e-mail after 6 a.m.
"It's a good feeling," Kennedy said. "It tells me we've built something. To have gone through the low point of layoffs in 2001 and to go through that and pull out of it - it gives you a sense of accomplishment. You feel good about the job you're doing and the job everybody else is doing."
Despite the excitement, most of Advertising.com's employees appeared to be hard at work yesterday, squirreled away in cubicles or whispering in small groups.
Many wore jeans and some had their feet propped up - Chuck Taylor sneakers in view - reminiscent of the commercial Internet's early days when companies boasted casual atmospheres and encouraged skateboarding in their halls.
At Advertising.com's headquarters in a rehabbed section of the old Procter & Gamble Co. warehouse, there were no skateboards, and the Ferbers were wearing suits - having banned flip-flops about four years ago.
"From where we started and where we are today, it's a dream come to fruition," said Alec Schleider, who went to high school with Scott Ferber in Pikesville and came to work for him five years ago.
"Scott was the president of his class. He's always excelled. He's always been a leader. It was pretty obvious he would do well."
But the brothers aren't ready to rest on their laurels.
"There's never an end," John Ferber said, leaning forward to make his point.
"It's always just the next chapter in the journey."
Advertising.com at a glance
The business: Places advertising on the Internet based on a mathematical calculation of its likely success rate
Started: October 1998
Founders: Scott and John Ferber, brothers from Owings Mills. Scott Ferber, 35, is chairman, CEO and president; John Ferber, 30, is vice chairman and chief product officer
Headquarters: 1020 Hull St., Tide Point corporate campus in Locust Point
Employees: 300 in eight countries, including 175 in Baltimore
2003 profit from operations: $12.1 million
AOL purchase price: $435 million