Marchex, Inc.

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Marchex, Inc.

413 Pine Street, Suite 500
Seattle, Washington 98101
U.S.A.
Telephone: (206) 331-3300
Fax: (206) 331-3695
Web site: http://www.marchex.com

Public Company
Incorporated: 2003
Employees: 211
Sales: $43.8 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: MCHX
NAIC: 518111 Internet Service Providers and Web Search Portals

Marchex, Inc. provides services that facilitate and promote growth in online transactions, acting as the middleman connecting online merchants and customers. The company offers performance-based advertising and search marketing services to merchants, who pay Marchex for increasing the efficiency and effectiveness their marketing efforts across multiple distribution channels, including search engines, product shopping engines, directories, and other Web properties. The Seattle-based company maintains offices in Provo, Utah; Eugene, Oregon; and Las Vegas.

Origins

In October 2000, a fast-rising, Internet-based company named Go2Net Inc. merged with another Internet-oriented company named InfoSpace Inc. It was a $1.5 billion deal that set the stage for the formation of Marchex, a start-up company whose founders were all former Go2Net executives. John Keister, Ethan Caldwell, and Peter Christothoulou were part of the Go2Net team that founded Marchex, led by a fourth member, Go2Net's founder and the principal executive of Marchex, Russell Horowitz. Marchex was the third company started by entrepreneur Horowitz, whose career provided the background of Marchex's formation.

Horowitz, whom Forbes described as "every inch a value investor" in its May 29, 2000, issue, formed his first company when he was in his mid-20s. In 1992, the Seattle-raised Horowitz co-founded Active Apparel Group Inc. with his uncle, establishing the company in New York City. In 1995, while serving as Active Apparel's chief financial officer, he took the company public in a self-underwritten initial public offering (IPO). The success of Active Apparel, which made women's, girl's, and unisex active wear sold under the Everlast, Converse, and MTV's The Grind labels, provided the seed money for Horowitz's next venture. In 1996, he decided to join the technology sector, teaming with John Keister, who previously had founded a Seattle-based software company named ViewCom Technology International, to launch Go2Net, a company whose rapid growth as an Internet-based venture brought national attention to its two young founders.

During the latter half of the 1990s, the dot-com industry was rife with asset-less, money-losing companies that nevertheless attracted hundreds of millions of dollars from excited investors. Although Horowitz pursued growth aggressively, assuming a particularly active stance on the acquisition front, he stressed predictable earnings as his overriding goal for his newest venture, a business approach out of vogue in the Internet frenzy of the late 1990s. "We focus on technology rather than getting involved in marketing and hype," Horowitz commented in a May 1, 1998 interview with Puget Sound Business Journal. His new company, Go2Net, launched its Web site in late 1996, the first step in Horowitz's plan to develop an online destination for Internet users, a destination that would link to many other Web sites, all owned by Go2Net. Horowitz's strategy was based on acquisitions, but he acquired with restraint, drawing criticism for his thrift from institutional investors and other Internet executives who were swept up in the hyperbolic craze of the day. "People wanted me to apologize for being profitable," he remarked in a May 29, 2000, interview with Forbes . "They said my priorities were all wrong."

At the beginning of 1997, just several months after launching his Web site, Horowitz filed for Go2Net's IPO, hoping to raise more than $10 million to finance the company's development into a popular portal. The public offering of the Seattle-based company was successful, raising $14.7 million. Armed with cash, Horowitz went on a buying spree, but he acquired prudently, buying Web sites with dedicated followings whose content was created by users. He quickly assembled a mish-mash of Web properties, purchasing Metacrawler, a search site that simultaneously searches the Internet's leading search engines, and Playsite, an online game area, among other purchases. What resulted was a network of branded Web sites that offered content related to a host of interests, including finance, entertainments, and sports. Sales were collected from a mix of licensing deals and advertising revenue, supporting a company that earned the esteem of investors and industry executives. Perhaps no greater proof of the company's rising stature was offered in 1999, when Paul Allen, Microsoft Corp.'s cofounder, invested in Horowitz's Go2Net. Allen bought a one-third interest in the company, paying $426 million in cash.

With a fresh supply of capital, Horowitz continued his acquisition campaign with vigor. Between the beginning of 1999 and mid-2000, he completed 13 acquisitions or investments. "Nowadays you're either a buyer or a seller. If you're neither, you're dead," he said in his May 29, 2000, interview with Forbes. Horowitz proved to be both, agreeing to sell Go2Net in one of the most high-profile mergers in 2000. In July, Go2Net agreed to merge with InfoSpace Inc., a provider of software applications to Web merchants and wireless companies. Headquartered a few miles from Go2Net's Seattle offices, Bellevue-based InfoSpace was led by its founder and chairman Naveen Jain, who was slated to become chairman of the merged company. Infospace's chief executive officer, Arun Sarin, was appointed as the company's vice-chairman and chief executive officer. From the Go2Net side, Horowitz was handed the titles of vice-chairman and president, while Keister, Go2Net's president, was made executive vice-president of InfoSpace's consumer division. The two other Marchex founders, Peter Christothoulou and Ethan Caldwell, moved from Seattle to Bellevue as well. Christothoulou, the senior vice-president of strategic initiatives at Go2Net, was appointed senior vice-president of corporate strategy and development of the combined company. Caldwell, senior vice-president and corporate counsel of Go2Net, assisted with integration of Go2Net into InfoSpace.

The arrangement of Go2Net executives working alongside InfoSpace principals at the new InfoSpace did not last long. The merger was completed in October 2000 and the exodus of Go2Net executives, except for Caldwell, who left in December 2000, occurred in January 2001. The executives not only left the company but also sold nearly all of their InfoSpace stock, including Horowitz, who sold 6.1 million shares at the end of the month.

The Birth of Marchex

Once Horowitz, Keister, Christothoulou, and Caldwell left InfoSpace they immediately began looking for a new business to start. The four-man team began reviewing new business opportunities in the retail, media, finance, and technology industries, devoting 18 months to their careful search. "We have been working pretty hard to get out there and look under the hood of a lot of companies and really understand what opportunities existed," Horowitz explained at the end of the search, as quoted in the March 7, 2003, issue of the Seattle Post-Intelligencer . "Not from the perspective of being an opportunist, but [looking] for the kind of opportunity that could transcend an economic cycle and would be interesting in the longer term," he added. The group decided to enter the dot.com world again, choosing to start a company that would facilitate commerce between online merchants and consumers by bringing them together. In January 2003, using their own money and contributions from individual investors, they formed Marchex, Inc. Each member of the founding team assumed executive responsibilities at the new start-up, led by Horowitz, who became the company's chairman and chief executive officer. Keister became president and chief operating officer of Marchex, the identical posts he occupied at Go2Net. Christothoulou became Marchex's chief strategy officer. Caldwell was appointed chief administrative officer and the company's general counsel.

There were similarities between Marchex and Go2Net, a commonality rooted in the business approach used by Horowitz. With Go2Net, Horowitz demonstrated a penchant for being an active acquirer, a trait that would be on display often during Marchex's early development. He also was known for being thrifty in his purchases, buying companies whose performance could be improved with proper marketing and managerial control. "If you look at it historically with the way we have approached things," Horowitz said in a March 7, 2003, interview with the Seattle Post-Intelligencer, "we have focused on what we think are under-commercialized and under-leveraged areas where we can add value." The objective with Marchex was to assemble a number of Web properties that would represent a collection of products and services tailored for online merchants. Marchex would be the go-between, enabling merchants to reach their target audiences through Internet search engines and directory results.

Company Perspectives:

We help merchants sell products and services through multiple online channels. Our platform of integrated performance-based advertising and search marketing services enables merchants to more efficiently market and sell their products and services across multiple online distribution channels, including search engines, product shopping engines, directories and other selected Web properties.

Starting out, Marchex was nothing more than a handful of people with no assets. The company would be built through acquisitions, with the first addition arriving five weeks after the company was incorporated. In late February 2003, Horowitz acquired eFamily and its subsidiary Enhance Interactive, paying $15.1 million for the Provo, Utah-based company. The purchase included the Web site ah-ha.com, a profitable asset that specialized in paid online searches, listing Web sites on search engines for a fee. With the addition of Enhance Interactive, Marchex' payroll expanded substantially, jumping from ten employee to 60 employees. A second acquisition followed in October with the purchase of TrafficLeader. A three year-old Eugene, Oregon-based company, TrafficLeader offered search-based tools that enabled merchants to identify customers. Once the TrafficLeader acquisition was completed, Marchex employed 166 workers.

IPO in 2004

After executing his first two moves on the acquisition front, Horowitz was ready to turn to Wall Street for support. He had taken Go2Net public not long after starting the company, and so he would with Marchex, filing for the company's IPO in December 2003. The stock offering was completed in March 2004, when Marchex sold four million shares at $6.50 per share. The company's stock rose 36.6 percent by the end of the first day, raising $27.2 million in what proved to be the most successful IPO in 2004 in the United States.

Marchex's stock value swelled as 2004 progressed, encouraging Horowitz to march forward with his acquisition campaign. In July 2004, the company acquired goClick.com Inc., a Darien, Connecticut, provider of technologies and services for small merchants. Marchex paid $12.5 million for goClick, enhancing its abilities to help its customers advertise through paid listings in search-engine results. The year's most important acquisition followed next, the largest acquisition in the company's brief history. In November 2004, Marchex announced it had agreed to acquire an obscure company based in the British Virgin Islands for $164.2 million. The company was Name Development Ltd., a $19-million-in-sales enterprise that operated in the direct navigation market. Direct navigation referred to the tendency of online searchers to type their search on their browser, typing www.videocamera.com for instance to obtain information about video cameras. According to one research study conducted by WebSideStory, 67 percent of online users arrived at Web sites by using the direct navigation technique in September 2004, up from the 53 percent who used the method in February 2002. Horowitz and his team estimated that 10 percent of the $4.5 billion Internet search market was tied to direct navigation. Name Development, which boasted operating profit margins of more than 80 percent, owned www.videocamera.com, as well as 1,000 other Web sites in categories such as travel, financial services, and electronics. The company owned properties such as Debts.com, LasVegasVacations.com, CareerInfo.com, and RentGuide.com.

Marchex concluded its first year as a publicly traded company as a much-coveted stock. The company's share price increased 223 percent during the year, making the company a darling of Wall Street. The financial community's favorable view of Horowitz's actions enabled the company to turn to the public market to finance its acquisition of Name Development. In mid-February 2005, the company offered 9.2 million shares at $20 per share and 230,000 shares of preferred stock, raising an estimated $230 million before deducting fees associated with the offering. In addition to paying for the Name Development acquisition, which was completed at the end of February, the company set aside money for future acquisitions. In April 2005, the company completed another acquisition, surely not the last purchase Horowitz would orchestrate as he guided Marchex through its formative years. The company paid $16.5 million for certain assets of Pike Street Industries Inc., a company based east of Seattle that averaged more than two million unique visitors per month to its Web sites. Pike Street operated Web sites such as Yellow.com and Whitepages.net, giving Horowitz several new Web sites to add to his armada of properties. As Marchex pressed forward under his control, future acquisitions promised to bolster the stature of the Wall Street favorite.

Principal Subsidiaries

eFamily; TrafficLeader; goClick; Name Development Ltd.; Pike Street Industries Inc.

Principal Competitors

Google Inc.; Microsoft Corporation; Yahoo! Inc.

Key Dates:

2001:: After merging their company with InfoSpace, former Go2Net executives begin reviewing options for forming another company.
2003:: The group of executives, led by Russell Horowitz, incorporates Marchex.
2004:: Marchex completes its initial public offering of stock and announces its acquisition of Name Development Ltd.
2005:: Marchex completes a secondary offering of stock and acquires Pike Street Industries Inc.