Answers.com, a company with a market cap of $100M and an enterprise value of $93M, today bought Lexico, the parent of Dictionary.com for $100M.

Where did Answers.com get this cash?  I’ll investigate, but fow now, is this an oddball move or does it make sense?

When I saw the news and began to write this post, I was flabbergasted and thought it was an oddball move.  But when you think in the context of a game of chess, tragically it all makes sense.

Answers.com is one of those companies that has a unique product.  It has the potential to be a leading reference website online, but its a rich price based on earnings alone.  In fact, Answers.com also announced that its revenue would be weaker than expected, so the stock is down $1.50. 

I own shares in the company and right now, and initially I was going to get out of the stock because this seemed reckless.  But as I thought of the rationale, at least one reason hit me (perhaps I am reading too much into this and giving the company too much credit). 

A cynic would wonder:

Why on earth would Answers.com make this acquisition?  It already trumped Dictionary.com’s much valued real estate on the upper right section of Google’s results page.  It’s one thing if someone bought Answers.com to inherit that real estate (though there’s no guarantee that Google would not bounce it), but why would anyone by Dictionary.com?

Then it hit me.  By buying Dictionary.com, Answers.com does two things:

- It consolidates the dictionary / reference market.  Dictionary.com probably gets a lot, and I mean a lot of organic traffic from results pages regarding standard definitions and even generic one word queries, which could be in the billions per month.

- More importantly, Answers.com needed an antidote to Google’s moodswings.  In other words, to the best of my knowledge, there is nothing in writing securing Answers.com’s slot in Google’s result page.  Any given day, Google could bump off Answers.com for someone else (after all, Google itself bumped off Dictionary.com for Answers.com). 

But by buying Dictionary.com, Answers.com ends up winnin regardless of whether Google uses it or Dictionary.com.  Of course, Google could also replace Answers.com with its own product, but then that would only make Answers.com more attractive as a target M&A, in my humble opinion.

In fact, one of the main dark clouds hanging over Answers.com is the argument that no company would want to buy it because they would risk Google bumping them off, something that would cause a massive loss of traffic.  So this is not only a hedge, but ultimately, it strengthens the company quite a bit… 

Disclaimer: long Answers.com

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