Walla Communications Ltd. (TASE: WALA) CEO Ilan Yeshua has been quiet for a year now. In contrast to Yediot Communications Ltd., whose media silence is part of the company culture, silence by Yeshua is something to talk about. The real reason for his silence emerged today: over the past few months, he has been cooking up the largest deal in Israel's Internet sector in many years - the acquisition of control of Israel's largest classified ads site, Yad2.
Besides the high price tag, Yad2 is one of the most profitable and fastest growing websites in Israel, which has few large sites that are also financially sound. The acquisition follows extensive collaboration between the two parties, and will enable Walla! to create real synergy between the websites and create real value for shareholders.
The deal will turn Walla! into the leader in classified ads sites, a profitable and growing sector, and will help it compete against Hebrew daily "Yediot Ahronot's" ynet, which operates classified ads site Winwin.
Classified ads site Homeless is also in the field, but Yad2 has a strong lead. Walla! was not prepared to concede, even if Yad2 cost it NIS 117.5 million, when its shareholders' equity stood at NIS 99 million at the end of the first quarter of 2010.
In addition to Yad2's advertising advantage, which is based on regular advertisers, and segmentation ability that enables Walla! to stop relying on display ads, and to diversify its sources of revenue, Yad2 presented impressive growth in revenue in 2009, and the site's value has nearly doubled in the past two years. The amount of the acquisition shows that Walla! believes that Yad2 is a cash cow.
Yad2's site is also more or less immune to the effects of international players like Facebook, Google, and YouTube, which have entered the Israeli market in recent years and quickly become the country's top websites at the expense of local portals. It is hard to imagine Google Inc. (Nasdaq: GOOG) or Yahoo! Inc. (Nasdaq: YHOO) setting up an Israeli classified ads site, but even in this respect the acquisition is a gamble.
Walla! has also not missed the social networks trend. Two years ago, it acquired 70% of Mekusharim at a company value of NIS 13 million, but was forced to watch from the sidelines as Facebook drew Israeli surfers and advertising budgets for social networks, including at Mekusharim's expense. Walla! hopes that, this time, fate will deal it a better hand.
Above all, however, the acquisition of Yad2 enables Walla! to meet its main challenge - the glass ceiling of the Israeli Internet market. Israel has one of the highest Internet penetration rates in the world, at 82%. This means that large websites can no longer substantially increase the number of surfers and high growth rates are already behind them. In this context, Yad2's potential is critical for Walla!
Besides Yad2's growth rate, the site does not need massive investment from Walla! for development, since Yad2 is not a traditional site that needs investment in content, and it is a lean company. However, that is not the snag lies. To date, Yad2's strategy was to spend lavishly on round-the-year advertising, both online and on television, which helped boost its growth rate.
This advertising strategy is very different from Walla!'s. The question remains whether Walla! will be wise enough to continue advertising Yad2, especially in view of the large amounts spent by "Yediot Ahronot" on Winwin. If not, it is possible that Yad2 may not continue to achieve similar growth rates, and the acquisition price will not justify itself.
Published by Globes [online], Israel business news - www.globes-online.com - on July 11, 2010
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