When executives with Move Inc. met with founders of ActiveRain Corp. at a January 2007 industry conference in New York City, they were worried that the rapidly growing real estate blogging and social networking startup might soon be snatched up by — or partner with — a Move competitor (see Part 1).

When launched in June 2006, ActiveRain had made a big splash among real estate professionals. The company not only provided members with a free blogging platform, but boosted their search-engine rankings by aggregating the contributions of thousands of contributors on ActiveRain.com.

Editor’s note: In a two-part series, Inman News examines issues surrounding Move Inc.’s decision to back out of a proposed acquisition of ActiveRain Corp., the blogging and social networking platform for real estate professionals. Part 1 examined the excitement surrounding the startup company in 2007, and Move’s courtship of the company’s founders. Part 2 details the debate within Move over the deal, and the impact that the decision to pull out had on ActiveRain.

When executives with Move Inc. met with founders of ActiveRain Corp. at a January 2007 industry conference in New York City, they were worried that the rapidly growing real estate blogging and social networking startup might soon be snatched up by — or partner with — a Move competitor (see Part 1).

When launched in June 2006, ActiveRain had made a big splash among real estate professionals. The company not only provided members with a free blogging platform, but boosted their search-engine rankings by aggregating the contributions of thousands of contributors on ActiveRain.com.

Realtors who created ActiveRain blogs often marveled that before long, the blogs were showing up higher in search-engine rankings than their own broker or agent sites. Within three months of launch, ActiveRain claimed 3,000 members, and said it was adding 70 new users a day (see story).

As the operators of Realtor.com, Move executives would later say they were worried about losing the battle to attract real estate consumers online using "non-listing" content, such as blog posts.

After meeting face-to-face with ActiveRain co-founders Jonathan Washburn and Matt Heaton in January 2007 at the Inman Real Estate Connect conference in New York City, Move executives kicked acquisition talks into high gear.

By March 9, 2007, Move and ActiveRain had signed a letter of intent in which Move stated its intention to pay $11 million to acquire ActiveRain, plus up to $22 million in potential earn-outs — future payments based on performance. The letter included a "no shop" provision barring ActiveRain from talking to other potential partners or buyers.

But even as negotiations continued, ActiveRain would later claim when the deal fell through, Move was developing its own blogging and social networking capabilities — and there was considerable dissent within the company over the need to acquire ActiveRain.

After more than four months of negotiations, on May 3, 2007, ActiveRain’s founders learned from their investment banker that Move was backing out the deal.

Before summer’s end, ActiveRain would file a $33 million lawsuit, claiming that the window of opportunity for the site’s founders to cash in on their success had closed during the four-month courtship between the companies.

The lawsuit has been settled on confidential terms, attorneys for both sides said last month, but court documents shed light on how the deal unraveled.

Move’s reservations

While non-binding, the March 9 letter of intent spelled out Move’s intention to pay ActiveRain $5 million up front, $3 million to help fund operations for 24 months, and another $3 million after two years. ActiveRain also stood to receive as much as $22 million in additional earn-out payments based on growth in membership and site traffic.

In the weeks of negotiations that followed the signing of the letter of intent, the deal fell through over the terms of the earn-out payments, lawyers for Move said.

Move wanted to find a way to ensure ActiveRain’s Realtor members would write original content of interest to consumers — not just other Realtors.

ActiveRain had already begun beta testing a new "consumer-facing" site, Localism.com, where real estate professionals could land business by writing about issues of interest to consumers.

But it had proved impossible to craft the earn-out formula so that it rewarded consumer-friendly content while preventing plagiarism, and the focus of the negotiations then reportedly shifted to determining what ActiveRain’s members would be worth to Move, that company’s attorneys said.

Throughout the negotiations with Move, ActiveRain had continued to grow at a rapid pace. When the negotiations began in earnest in January, ActiveRain claimed about 14,500 members — a figure that had more than doubled as talks dragged into May.

But Move wanted to review the membership roster "to determine how many members were real estate agents, how many were already Move customers, and how successful the agents were — and thus, how likely they were to buy Move’s solutions," the company’s lawyers said in a Dec. 15, 2008, motion for summary judgment in the case.

ActiveRain had provided a list of its members to Move in a PDF (printable document format) file. But Move sought — and on May 2, obtained — a more extensive database file that included members’ names, user names, employers, e-mail addresses, and join dates.

Move says it took the database and compared it to its own lists of Realtors and their historical listing counts. The idea was to see how many ActiveRain members were real estate agents, whether Move had existing business relationships with those agents, and whether the agents were successful enough to afford Move’s online products, Move’s attorneys said.

Move would later claim the analysis showed that most of ActiveRain’s members were already Realtors, and therefore already had a business relationship with Move. Those who weren’t had "relatively low historical sales — making them much less attractive to Move as potential customers," the company’s lawyers said.

ActiveRain’s attorneys have since questioned whether Move actually conducted such an analysis, or that it was the real reason the deal fell through.

The deal fell through, ActiveRain alleged, because Move’s true intention all along had been to foil the company’s other suitors and gather intelligence on ActiveRain’s operations while Move built its own, competing site.

"Move’s internal documents reveal that when it asked ActiveRain to sign the (March 9 letter of intent), it had no intention of doing the deal on the basis stated," attorneys for ActiveRain argued.

ActiveRain’s confidential information "constituted a ‘ready-made’ set of business and marketing plans, customer compilations, and explanations of successful techniques and methodologies for Move’s desired entry into the social networking Web site market for Realtors," the company’s lawyers said in a Jan 12, 2009, response to Move’s motion for summary judgment in the case.

ActiveRain’s lawyers called Move’s claim to have only discovered at the last minute that the company already had relationships with many ActiveRain members an "excuse for canceling the transaction" that was "plainly" a pretext.

Move had already scraped the ActiveRain site in January and concluded that there was probably at least a 50 percent overlap between Move’s customer database and ActiveRain membership, attorneys for ActiveRain said.

Move, they said, has been unable to produce any copies of the analysis it says it did the night before pulling the plug on the acquisition, after acquiring the more extensive database from ActiveRain. "Move witnesses cannot even recall who performed the comparison" or basic details about the analysis, ActiveRain’s lawyers argued.

The backstory

Not in dispute is that in the first week of May, Move informed ActiveRain that the deal was off. At a National Association of Realtors conference two weeks later, Realtor.com announced it would offer free blogs for Realtors.

At the time, Errol Samuelson — who’d recently been named president of Move’s affiliate, Realtor.com — said about 1,000 agents had been testing Realtor.com’s blogging platform for four to five months. Realtor.com, Samuelson said, was adopting "Web 2.0 principals" such as consumer interaction, richer data and online video (see story). …CONTINUED

Realtors who sign up to participate in Realtor.com’s "Let’s Talk Real Estate" blog today are promised that they can increase the ranking of their personal Web site when posts get picked up by major search engines. "Search engines elevate the status of your personal Web site when it is associated with big, more known sites like Realtor.com," the company promises.

Attorneys for Move have said the blogging platform rolled out by Samuelson in May represented enhancements to existing blogs begun before the company entered into discussions with ActiveRain, and did not rely on any confidential information gleaned during the negotiations.

ActiveRain executives later said they knew about Move’s existing blogging platform. But they were not aware Move had continued to develop its blogging platform to incorporate social networking capabilities similar to ActiveRain’s, or that there were disagreements within Move about the wisdom of acquiring their company.

Had they been aware of those circumstances, ActiveRain’s founders said, they would never have shared confidential information with Move or agreed to a "no shop" clause during negotiations.

"We knew at that point they were working on a blogging platform for Move customers — or Top Producer customers," Heaton said in a deposition. "It was never disclosed to us it was a large-scale company initiative outside of a blog for Top Producer customers."

ActiveRain would later allege that Samuelson and a group within Move’s software services affiliate, Top Producer Systems, were engaged in developing a blogging and social networking site for Realtors along the lines of ActiveRain.

Samuelson, the lawsuit alleged, "resented the idea of Move paying $30 million to ActiveRain, while Move had given his group a ‘shoestring budget,’ " citing depositions of Move executives and company e-mails.

In a Jan. 8 e-mail to other Move executives, Samuelson boasted that by the end of the month Move "should have technology approximately equivalent to ActiveRain and by March we should have superior technology."

The next day, Samuelson said in another e-mail that, while Move could probably "beat them (ActiveRain) on our own," the company did not want "to take that chance, and … have them partner with a competitor."

ActiveRain would later claim in its lawsuit that Move resolved this "internal dilemma" by "taking ActiveRain off the market" while it continued its own efforts to build a competing social network site.

Then — armed with ActiveRain’s confidential information and the results of its efforts to build a competing site — "Move could make a decision as to whether or not actually purchase ActiveRain," ActiveRain’s lawyers said.

In its lawsuit, ActiveRain said Move should have created a firewall preventing Samuelson and his group from accessing confidential information that ActiveRain provided during a due-diligence period.

The information allegedly included details on the workings of the ActiveRain Web site, community growth plans, strategies for attracting and retaining members, and plans to monetize the site’s growing traffic.

Samuelson was "deeply involved" in Move’s due-diligence research into ActiveRain’s inner workings, and "apparently had access to most or all of the confidential information ActiveRain" disclosed during that period, the lawsuit alleged.

But Heaton would later tell Move attorneys during a deposition that the company never asked that such a firewall be put in place. ActiveRain’s investment banker, Chuck DelGrande, would also acknowledge that Move executives never promised or guaranteed that the deal would close.

The day after the ActiveRain deal fell through, Move’s director of consumer innovations, Dustin Luther, e-mailed Samuelson on progress made in getting Move’s blogging and social networking efforts off the ground.

Luther’s e-mail referred to requests by his superiors at Move that he "replicate the ActiveRain platform" so Move could develop "a bridge between blogging and social networking."

Attorneys for ActiveRain cited Luther’s e-mail as part of the "compelling" evidence that Move used ActiveRain’s confidential information and trade secrets to further its own efforts. In a deposition, Luther said he had not done so himself.

Other e-mails submitted as evidence in the lawsuit show that Luther — known in the industry as the founder of one of the first collective real estate blogs, Rain City Guide — thought it might make more sense to acquire ActiveRain than try to copy the site’s model. …CONTINUED

 

In an April 27, 2007, e-mail to Move Chief Operating Officer Jack Dennison, Luther offered to respond to an internal company memo authored by Samuelson that was critical of the plan to acquire ActiveRain.

"I hate to be pigeonholed as the ‘AR Supporter,’ but if it is useful for me to play that role, I’d be happy to provide another perspective," Luther told Dennison.

By that time, the idea of tying some of the $22 million in proposed "earn-out" incentive payments to the type of content generated by ActiveRain users, instead of site traffic, had been raised in negotiations.

In an April 20, 2007, memo, "Project Waterfall Status: Yellow — moving towards Red," Samuelson stated that Move might end up paying for non-original content of little interest to consumers, including blog posts detailing listings and open houses, or containing plagiarized or copyrighted material cut-and-pasted by ActiveRain users from other sites.

The next day — a Saturday — Luther wrote a lengthy e-mail to Dennison explaining why, in his view, Move would likely face similar challenges in building its own blogging and social networking capabilities.

"My overall impression is that it would be quite easy to kill this deal and that may still be the best course of (action) if there is not institutional support from the (Realtor.com/Top Producer) team," Luther wrote. "However, after working with the blog development staff we have in-house … I think we often underestimate the most difficult aspects of building a healthy blogging community."

Luther told Dennison that ActiveRain’s founders, Heaton and Washburn, "live and breathe the blogging community and have proven that throwing a bunch of money at the ‘social networking’ problem is not necessarily the answer."

As ActiveRain evolved as a site with more capabilities, Heaton had succeeded in "enhancing the community" with every new release, Luther said. "I think we would have an extremely hard time replicating the direct connection that they’ve made with their community," Luther warned.

Attorneys for Move said those and other internal e-mails debating the wisdom of the ActiveRain acquisition demonstrate that the company was serious about closing the deal, but in the end decided against it.

During the due-diligence period, Move lawyers said, Samuelson was involved in researching ActiveRain’s business practices because his Top Producer business unit was slated to oversee the company after the acquisition was completed.

After the departure in April of Allan Merrill — the Move executive who’d pushed an acquisition of ActiveRain after meeting with the company’s co-founders in January — Dennison had become Move’s point man on the deal, according to depositions of those involved.

Dennison said he and Merrill shared a common belief that Move was in a battle for the consumer audience and that "we needed to win that race."

"As ActiveRain existed at that time, it was a real stretch for me and for most people within Move to believe that they were important in that war," Dennison said in a deposition. "But that was the debate we were having. If they can really bring a big consumer audience, then we want to keep that audience out of our competition’s hands."

At a May 3 meeting of Move’s board of directors, Dennison outlined the pros and cons of an acquisition of ActiveRain — and recommended that Move back out of the deal.

Valuing ActiveRain

The day after Dennison informed ActiveRain that the deal was off, DelGrande — ActiveRain’s investment banker — began notifying potential suitors that the company was for sale at "virtually identical terms discussed with Move," Move’s lawyers claimed.

ActiveRain had discussions "with numerous potential suitors after discussions with Move ended, including some of the same companies it talked to before the ‘no shop’ provision took effect," Move attorneys said, citing e-mails and a deposition of DelGrande.

According to court documents, those suitors included Classified Ventures LLC and Inman News founder and publisher Bradley Inman.

Classified Ventures — an online advertiser that is a joint venture owned by five newspaper chains — signed a nondisclosure agreement with ActiveRain on May 4 but did not invest in the company.

In a May 6 e-mail exchange with Inman, DelGrande attempted to establish an ActiveRain valuation for prospective investors. DelGrande, in recommending Inman take a 5 percent stake in the company, maintained that if anything, ActiveRain was worth more than Move had been willing to pay because membership had continued to grow during the months of negotiations.

"Using the same valuation metrics which Move employed in February" to justify the $5 million to $8 million range, "one could claim that ActiveRain is worth almost four times that now," DelGrande said, and suggested a value in the range of $9 million to $10 million or higher for the purposes of an investment. …CONTINUED

Inman News CEO Don Belanger said in a statement that Inman News did not make an equity investment at the time and does not have an ownership stake in ActiveRain today.

DelGrande also stated that he had three "fall-back" conversations already under way with firms that had not been contacted since the "no-shop" agreement became effective in the March 9 letter of intent. "We’ll find them a good home," he stated in an e-mail.

For their part, attorneys for ActiveRain have disputed Move’s claim that DelGrande’s estimates of ActiveRain’s worth shows that the company was not harmed by the "no shop" provision in place during negotiations with Move.

A $2.75 million investment ActiveRain landed from Move competitor HouseValues Inc. six months later "was subpar" in comparison to the terms being discussed with Move, they said, and "dictated by the weakened condition and changed market … as a result of Move’s misconduct."

As ActiveRain continued its search for partners or buyers, it was a difficult time for the company, court documents show.

At Move’s behest, ActiveRain said, it had allowed the lease on its offices to lapse, and was forced to relocate when the deal fell through. Having also terminated a line of credit with Bank of America, the company found itself in a "severely cash-constrained" position, according to an analysis of economic damages prepared by a consultant on the company’s behalf.

In a deposition, Heaton said ActiveRain lost two important employees after losing its line of credit, in part because it was unable to pay them for more than a month, and also because of uncertainty about the company’s future.

It wasn’t until November 2007 that HouseValues emerged as a savior, acquiring 29 percent of ActiveRain in exchange for $2.75 million. Under the terms of the deal, HouseValues — which has since rebranded as Market Leader — also acquired the right to buy the rest of ActiveRain’s remaining shares at a price that increases with the passage of time.

Aftermath

On Feb. 16 — one week after a confidential settlement in the lawsuit was reached — ActiveRain announced it would begin charging new members $29 a month to make full use of the company’s blogging platform. The company said the decision was unrelated to the settlement (see story).

While ActiveRain continues to evolve — users can use the platform to post to the consumer-facing Localism.com and their own "outside" blogs — it’s competing in a more crowded space. Big real estate sites like Zillow and Trulia, as examples, provide real estate professionals with similar opportunities to interact with consumers through social networking.

Trulia and Zillow, which offer consumers access to deep databases of listings and real estate statistics, launched online communities in the spring of 2007, around the same time that Move was preparing to roll out its own blogging and social networking capabilities.

Trulia launched its Trulia Voices community in May 2007 (see story), and Zillow similarly launched its own community tools and promised real estate professionals they’d have the ability to reach the site’s audience "at the ZIP code level" (see story).

After passing up an opportunity to acquire the remaining shares of ActiveRain in December for $17.5 million, Market Leader retains the option to complete an acquisition at a price that keeps adjusting upward over time. Market Leader can close the deal for $25 million if it acts during the first half of 2009, $40 million during the second half of 2009, or $60 million if the first half of 2010.

In announcing a $13.1 million loss for 2008, Market Leader executives did not say whether they intend to complete their acquisition of ActiveRain. But they did tell investors that the company’s strategy in 2009 will be to conserve the $58.6 million cash position they ended the year with (see story).

In a statement provided to Inman News, Market Leader senior marketing director John Gallagher called ActiveRain "an important strategic partner for Market Leader. We continue to be impressed with the ways they help real estate professionals be successful, and are always looking for new ways we can participate in their community."

Jonathan Washburn, who declined to comment for this story, continues to serve as ActiveRain’s CEO. Co-founder Matt Heaton left the company in August but still serves on its board of directors. Heaton told Inman News he is preparing to launch a new social networking platform for youth and recreational league sports teams, called Timu.

Most of the Move executives involved in the company’s aborted play for ActiveRain have moved on.

Allan Merrill — the Move executive who was perhaps the biggest proponent of acquiring ActiveRain — announced his departure from Move just before the deal fell through. Merrill became the chief financial officer for Beazer Homes USA Inc. in May 2007.

Mike Long, who came to Move in 2002 as the head of a new management team in the wake of a financial scandal, retired from Move in January (see story). Dennison, who came on board at the same time to help turn the company around, resigned from Move in September 2007.

In February 2007, while engaged in negotiations with ActiveRain, Move announced that Realtor.com President Allan Dalton had been reassigned to lead a team developing a secretive "new business venture" for Move. Samuelson was named president of Realtor.com at the time, retaining the same title with Top Producer Systems.

Dalton, who’d been hired as Realtor.com president in 2002, resigned in March 2008 (see story). In May 2008, Move executives said they had canceled the secretive business venture, without ever disclosing exactly what it was to have entailed (see story).

Samuelson, however, remains president of Realtor.com and Top Producer Systems.

Luther, who served as Move’s director of consumer innovations for a year, left Move in December 2007. He is now a consultant who’s known for appearances at industry events — including the most recent Inman News Real Estate Connect conference in New York City.

***

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