Answers.com To Acquire Dictionary.com: Wrong Answer

Internet reference content site Answers.com (ANSW) announced after the bell Monday that it would buy Lexico Publishing Group, owner of Dictionary.com, Thesaurus.com and Reference.com, for $100 million in cash. The transaction is subject to financing [which may be tough given that Answers.com’s market cap is only $101.3M as of Monday's close].

According to the press release, Lexico had revenues of $7 million, EBITDA of $2.9 million and net income of $2.8 million in 2006. Answers.com calls Lexico “highly profitable,” but like everything else, that phrase is relative. The transaction price values Lexico at almost 15x trailing sales, over 33x trailing EBITDA, and over 34x trailing income. That’s not cheap at all in my book, and financing costs will only make the transaction more expensive.

Answers.com CEO Robert Rosenschein calls the deal “a transformative event.” He stated, “Post-transaction, we estimate that over 70% of our total traffic will now be direct from end users or people searching specifically for the term ‘dictionary’ in search engines.” Ask yourself: is that really the audience that advertisers are striving to reach?

I don’t think investors in the chronically under performing Answers.com should find solace in today’s news. At best, the company has paid a very dear price to double its revenues. At worst, the company has bought a property that will cannibalize its core operations and burden the combined company with significant debt.

Also, the deal makes Answers.com even more leveraged to a downturn in cost-per-click advertising. This must read article from TheStreet.com’s James Altucher shows why a drop in CPC prices may be on the horizon.

Bottom line: For a firm that calls itself Answers.com, management really should have a better solution to poor performance than overpaying for another third-tier content company.

ANSW 1-yr chart

Disclosure: No position.