Return Path Buys Habeas
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26 AUGUST 2008
On August 12, 2008, Return Path announced it will buy Habeas.
This is a merger of directly competing companies.
What Return Path and Habeas Do
- Spam is a large proportion of email. Many technologies exist to suppress spam emails, so that users don't have to deal with them.
- Spam control technologies often suppress bona fide emails. For example, a bank might email out 2 million statement announcements to its customers. These are bona fide, but many spam control products will treat these as spam and stop the emails being delivered to recipients.
- Return Path and Habeas offer technology and consulting to help:
- Senders of email maximize the chance that their emails get through spam filters.
- ISPs and other service providers improve their abilities to catch spam.
- The core of this business is the maintenance of a database of electronic addresses of senders that are very likely to be sending bona fide email--known as a "whitelist" or "safelist."
- Both organizations also offer delivery monitoring (determining how much email actually gets through to inboxes and gets read), scoring (evaluating an email on its likelihood to get treated as spam), and rendering services (making sure emails appear to recipients the way the sender wants them to appear).
- The main users of such technology are:
- Email marketers and publishers such as National Geographic and eBay, which need to have as much of their email as possible arrive in users' inboxes.
- ISPs such as Comcast and RoadRunner, and companies that provide spam control technology such as Cloudmark and Bizanga.
Buyer Return Path Background
- Founded in 2002.
- 175 staff pre-acquisition.
- Revenues: calendar 2006 $20M; calendar 2007 $27M; calendar 2008 $35M (estimated).
- Roughly half of Return Path's revenues come from deliverability.
Seller Habeas Background
- Founded in 2002.
- 40 staff.
Benefits for Buyer Return Path
- Habeas charged much less than Return Path and the other main deliverability specialist, Pivotal Veracity. Habeas' removal makes it easier for Return Path to maintain its pricing.
- Return Path was the largest vendor in its niche; Habeas the second largest. Thus it consolidates its position as market leader.
- Deliverability revenues will be increased by 30%-40% with little additional cost after a short adjustment period.
- Habeas clients are mainly midsized email marketers and publishers, while Return Path's clients are mainly larger businesses. Thus Habeas' sales and marketing team help Return Path expand its reach and visibility into the midmarket.
- Economies of scale. Return Path goes from:
- 1,000 email marketing and publishing clients to 1,500 such clients.
- 100 ISPs and filtering firms (e.g., spam control vendors) to 130 such clients.
Benefits for Seller Habeas
- Sales and marketing staff will have continued employment opportunities, within Return Path.
Seller Habeas: Valuation Considerations
- Revenues: calendar 2007 $5M; calendar 2008 projected $8M.
- Revenue growth rate: 50%.
- Not profitable; had run out of cash.
- 40 staff.
- Funding to date: Total of $10M:
- August 2002, Series A funding round led by Skymoon Ventures.
- September 2004 B round for $7.5 million, led by Canaan Partners and Diamondhead Ventures (included Skymoon Ventures).
- 400 paying clients in the email marketing and publishing field, 30 that are ISPs and filtering firms (e.g., spam control vendors).
- Was unable to raise further money, either by equity or loans. Thus it was forced to find a buyer or go out of business.
- Had difficulty finding a buyer. It was reduced to a fire sale to a single bidder, its main competitor.
Terms of Deal
- Price not disclosed. It was a cash deal, with a Ferris Research preliminary estimate of $1M; the figure was not greater than $4M. Ferris Research suspects that all or most of this money was used to pay off a bank line of credit.
- Ferris Research preliminary estimate of price/revenue ratio: .2 to 1.
- All common shares and stock options worthless. Ferris Research preliminary estimate is that preferred investors get between $0.00 and $0.05 back on each $1.00 put in.
The reputation management/email deliverability field is small. We are not aware of directly comparable deals. The following have some overlap, however:
|Buyer/Seller ||Date ||Description ||Price |
|Proofpoint/Fortiva ||6/08 ||Spam control vendor buys archiving firm ||$155M |
|Google/Postini ||7/07 ||Purchase of malware filtering firm with archiving ||$625M |
|Websense/PortAuthority ||1/07 ||URL filtering firm buys data leak prevention firm ||$90M |
|Cisco/Ironport ||1/07 ||Spam control, reputation services ||$850M |
Technology Integration Plans
- Habeas' technology will not be integrated with that of Return Path.
- Habeas' technology will be abandoned.
Possible Negatives/Concerns About the Merger
- Return Path will probably need to increase the fees it charges Habeas clients. Many may stop being clients as a result.
- The two companies felt strongly competitive, and staff in both companies often felt antipathy towards the other organization. Habeas sales and marketing staff, and any others retained by Return Path, may not find their new home attractive.
Other Ferris Research Comments
- Original asking price was approximately $20 million.
- Other players offering deliverability services include Cisco/SenderBase, Cloudmark, ISIPP, Goodmail, Lyris, Pivotal Veracity, and Secure Computing/CipherTrust.
- Pivotal Veracity is now Return Path's main competitor.
- Habeas was initially put on the market for $20M. There were no takers. Habeas was very keen not to be sold to Return Path, its major competitor. However, Return Path was the only bidder, and it was forced to accept Return Path's offer.
- New email reputation technologies are still being developed. Expect new players to emerge.
- Content-based filtering, such as where you scan for suspicious words or phrases, are useful techniques for spam control. However, they are unreliable and compute-intensive. Much weeding out of malware is done by checking senders' IP or other identifying addresses. Return Path is a leader in providing reputation information based on the sender's behaviour
Got Additional Relevant Information?
- We're especially interested in information on the following:
- Price paid.
- The extent of bank debt paid off.
- Total funds raised by Habeas.
- Return on $ for preferred investors.
- Contact David Ferris at +1 (415) 367-3436, or firstname.lastname@example.org. Unless you indicate otherwise, we'll assume all communications are confidential.
... David Ferris