Global Biz

Yahoo pays $28m for unprofitable online ad service

(Agencies)
Updated: 2011-05-19 10:04

SUNNYVALE, California?- Yahoo Inc. has bought an unprofitable online advertising service called 5to1 Holding Corp. for $28 million as part of an effort to revive its revenue growth.

The deal announced Wednesday provides Yahoo with more tools to place online ads for big companies looking to promote their brands.

About 20 websites work with 5to1 to sell their unused advertising space. Those efforts haven't been fruitful for 5to1, which has been losing money since its 2008 inception.

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Last year, 5to1 lost nearly $9 million on revenue of less than $1 million. The company, based in Santa Monica, had 19 employees, including five sales representatives, as of March, according to a filing with the Securities and Exchange Commission. The same filing indicated that 5to1 would need to raise money to keep operating next year.

Yahoo's earnings have risen recently, but its ad revenue hasn't kept up with the rest of the Internet. Last year, for instance, Yahoo's ad revenue increased by just 1 percent while total ad sales on the Internet climbed 15 percent.

The financial funk has weighed on Yahoo's stock price, leaving it far below the $33 a share that the company could have gotten had it accepted a takeover offer from Microsoft Corp. three years ago. Yahoo shares fell 4 cents Wednesday to close at $15.96.

Investors also have been shunning 5to1's shares, which trade in the over the counter market. The stock price stood at $1.01 before the deal was announced Wednesday, giving 5to1 a market value of $36 million based on the company's outstanding shares as of May 10. That means Yahoo is buying 5to1 at a roughly 20 percent discount from 5to1's market value.