Code name 'Waterfall': Move's play for ActiveRain

Court documents reveal behind-the-scenes drama of failed acquisition

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Inman Connect New York | January 29 - February 1, 2019

Editor’s note: In this two-part series (read Part 2: "Why did Move spurn ActiveRain"), Inman News looks at Move Inc.’s aborted plan to buy ActiveRain Corp., the blogging and social networking platform for real estate professionals. ActiveRain filed suit against Move after the deal fell through in May 2007, and a settlement has been reached in the case. Although the terms of the settlement are confidential, the legal battle between the companies provides a rare glimpse into the complexities of Web 2.0 startups and acquisitions.

When Move Inc. executives met with ActiveRain Corp.’s founders two years ago at an industry conference in New York City, they walked away thinking the real estate blogging and social networking site might be worth as much as $50 million in two years.

But in the weeks that followed, negotiations between the companies fell apart, and ActiveRain ended up suing its former suitor. The lawsuit claimed that for four months, ActiveRain was barred from shopping for other partners — even as Realtor.com operator Move Inc. was working to build its own competing site.

ActiveRain executives would later say they agreed to a "no shop" clause and revealed confidential information about their business practices because they had assurances from Move that the deal was set to close and that only minor details remained unresolved.

By the time the deal fell through in May 2007, the window of opportunity for ActiveRain’s founders to cash in on their site’s success had closed, attorneys for the company claimed. In an August 2007 lawsuit ActiveRain sought $33 million in damages, alleging breach of contract, unjust enrichment, unfair competition, fraud and deceit.

Last month, attorneys for Move and ActiveRain said a settlement had been reached in which each side would bear its own costs and attorneys’ fees. They asked U.S. District Judge Dean Pregerson to dismiss the case "with prejudice" — meaning ActiveRain would be barred from filing another suit making the same claim.

The terms of the settlement are confidential, and both companies declined further comment. But a review of hundreds of pages of court filings in the case reveals how representatives at both companies went from seemingly love-struck suitors to bitter litigants.

While ActiveRain was eventually able to raise $2.75 million by selling a 29 percent stake in the company to HouseValues Inc., it’s perhaps no longer regarded as the hot property it once was. HouseValues — which has since become Market Leader — passed on a chance in December to acquire the remainder of ActiveRain for $17.5 million, attorneys for ActiveRain say.

The housing downturn, credit crunch and global financial crisis have generally made it more difficult for startups to attract investors, and even publicly traded blue chip companies have seen drastic decreases in their valuations.

ActiveRain announced Feb. 16 that it would begin charging new members $29 a month to make full use of the company’s blogging platform. …CONTINUED

With the landscape of real estate-related blogging and social networking sites now crowded with competitors, some ActiveRain users question whether this pay-per-membership model will work. ActiveRain officials say the lawsuit settlement and decision to charge fees to new members are unrelated (see story).

Sunny skies

According to depositions, e-mails and internal company documents filed as evidence in the case, a host of ActiveRain suitors were on hand in January 2007 at the Inman Real Estate Connect conference in New York City.

At the conference, Allan Merrill, Move’s executive vice president of corporate strategy, and Errol Samuelson, president of Move’s software services affiliate, Top Producer Systems, met with ActiveRain founders Jonathan Washburn and Matt Heaton.

At the time, ActiveRain had an advantage as a "first mover" in the real estate blogging and social networking space, the company’s lawyers would later claim. After launching in June 2006, the free site had grown rapidly, as Realtors and other real estate professionals flocked to take advantage of the site’s high profile in search-engine rankings.

With thousands of users creating content for the site, search engines like Google were giving ActiveRain a prominent place in their rankings, helping Realtors who blogged on the site to connect with consumers. By the time of the Connect conference, ActiveRain had no revenue or profits but could claim 14,500 members, including 10,000 Realtors.

Move had hired a prominent real estate blogger, Dustin Luther, and developed a set of company blogs. A team under Samuelson was working to develop more sophisticated blogging and social networking capabilities for Move.

Realtors are "probably our largest untapped resource," Luther said in a Nov. 1, 2006, e-mail to Move’s then-CEO Mike Long. "There are hundreds (if not thousands) of Realtors who write about topical issues on a regular basis, and yet we don’t really have an effective way to empower them with the necessary data and arguments when news breaks."

The two-page e-mail — which Luther also copied to Merrill, Samuelson and Realtor.com President Allan Dalton — lamented that many real estate bloggers "are starved for content, so they simply paraphrase the Zillow talking points," he said of the property valuation site’s summaries of market trends. "At this point, the group that is most effectively organizing this resource (Realtors) is the people at ActiveRain."

After meeting with Washburn and Heaton in New York, Merrill sounded relieved in reporting to colleagues at Move in an e-mail that the company’s founders were "still pretty humble." But Merrill complained that "a very competitive situation" had emerged at the Connect conference, with ActiveRain’s executives "being treated like rock stars."

Google put on a "full court press … right in front of my eyes," Merrill marveled, adding that ActiveRain executives had engaged in "a variety of conversations about ‘investments’ and ‘sales’ with everyone from Trulia to Zillow to Yahoo! to Craigslist to Google."

Merrill said ActiveRain executives were reluctant to enter into a partnership with Move, since the companies were competitors. But instead of becoming a partner through an investment in ActiveRain, Move could structure a buyout deal in which most of the payments would be contingent on the site’s future performance, Merrill said.

In his e-mail to colleagues, Merrill proposed a hypothetical scenario under which Move might pay $10 million up front and another $30 million to $40 million in "earn-outs" based on ActiveRain’s future membership, content and site traffic. If ActiveRain grew as expected, Merrill said, "They’re not irrational, in this market, to be thinking $50 million in two years on a stand-alone basis." …CONTINUED

Merrill acknowledged that one argument against buying ActiveRain was that Move might instead be able to leverage its existing relationships with Realtors through Top Producer and Realtor.com to "build our own Realtor-generated content site pretty quickly, erasing the near-term advantage ActiveRain has."

"While I think that argument has merit, I think it’s dangerous to assume they will either sit still or be on their own for very long," Merrill’s e-mail concluded.

The negotiations

After the face-to-face meeting between the companies at Connect, things moved quickly — for a time.

In a Jan. 12 e-mail, Merrill told Heaton that Move executives "believe we can get comfortable with" an acquisition value of up to $40 million, including $30 million in "earn outs" if membership hit 100,000 and the site generated 3 million unique visitors a month.

"That is a ton of money for this company," Merrill told Heaton. "I’ve done a fair bit of work on ‘comparables’ and can tell you that most of these deals are getting done around $200 (a) member."

Move and ActiveRain entered into a nondisclosure agreement on Jan. 16, agreeing to protect each other’s confidential information. Move employees discussing the deal were to use a code name for ActiveRain: "Waterfall."

At about the same time, Move asked ActiveRain to cut off discussions with other companies. A formal "no shop" provision wasn’t in place until the companies signed a March 9 letter of intent. But ActiveRain later claimed that from the third week in January until the deal fell through in May, it was effectively barred from pursuing other deals — a period of more than four months.

Heaton would later say it was a time when nearly everyone in the online real estate industry was looking to "build or buy" blogs and social networks.

During this period, ActiveRain claims it terminated negotiations to enter into a joint venture with Trulia.com and Eppraisal.com, and suspended discussions about an equity investment and business relationship with Zillow. ActiveRain also said it halted discussions about an equity investment by parties associated with the Inman Group, the parent company of Inman News.

"ActiveRain was an exciting new company, but Inman did not make an equity investment, nor do we have any sort of ownership stake now," said Inman News CEO Don Belanger, in a statement.

According to the March 9 letter of intent, at that time Move was contemplating whether to pay $33 million to acquire ActiveRain — $11 million plus up to $22 million in potential earn-outs. But less than two months later, the deal was off.

Next: Move pulls the plug, and ActiveRain scrambles for another suitor. Read Part 2: "Why did Move spurn ActiveRain?"

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