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Babylon Troubles Jeopardize IronSource Merger

Despite problems with Yahoo! , Babylon is saying that it is business as usual as far as the merger is concerned.
Noam Lanir Wikipedia

Noam Lanir/ Babylon

The drop in value at online translation company Babylon Ltd. (TASE:BBYL) is not just because investors are worried that Yahoo! Inc. (Nasdaq: YHOO) might cancel its agreement with the company, but because they fear that the merger with ironSource Ltd. will be cancelled or carried out at a lower value. Babylon and ironSource are due to merge by the end of the year. The merger was reportedly due to be made a valuation of over $1 billion for the “new Babylon”, and that Babylon’s shareholders would own a third of the merged company. However, the 30% drop in Babylon’s share price last week reduced its market cap to a six-month low of NIS 926 million ($257 million) The share price corrected upward 4.9% in morning trading on Monday to NIS 19.45.

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On Thursday, Babylon said that Yahoo would not cancel their agreement, as it had threatened to do the week before, but warned that complying with Yahoo’s demands would “reduce the company’s revenue.” This will affect its growth, profitability, and company value.

Under these circumstances, the merger with ironSource faces a difficult test. The companies’ relations are based both on strategic synergy, but also on the friendship of their controlling shareholders: Babylon controlling shareholder Noam Lanir is so close to ironSource’s people that the merger will not involve an investment banker to mediate between the parties and create a common language for the deal’s details.

Babylon, as a public company, is saying that it is business as usual as far as the merger is concerned, and that the strategic move is justified. Officially, it says, “The company is still in the process of locating and monitoring the problems and clarifying them with Yahoo, and it will announce any material development on the matter, as required. The company has no further updates about the merger negotiations with ironSource beyond the progress update announced on October 7, and on this matter, too, the company will announce developments as required.”

Babylon and ironSource operate in different parts of the Internet content distribution food chain, complementing each other. ironSource offers a platform for installing online programs, which may be the largest platform in the world in terms of activity. Babylon has used ironSource’s distribution system for a long time to distribute its software and tools, which include directing users to search engines and is the company’s main source of income.

Outwardly, Babylon is acting as though nothing has changed with regard to the pending merger. It is apparently based on the fact that both companies operate in the same industry that has developed around online advertising technologies, and any action that hurts Babylon could affect ironSource as well.

An example of how industry events are reflected in the capital market is the pending merger between Perion Network Ltd. (Nasdaq:PERI: TASE:PERI) and the toolbar business of Conduit Ltd. The merger’s numbers show that a substantial part of Conduit’s value vanished in the past year; not because the company stopped growing, but because of heightened sensitivity about online advertising among Internet giants, such as Google Inc. (Nasdaq: GOOG), a source of revenue for both Babylon and Conduit. The constraints that Google, the leading market search engine (and revenue) provider, puts on the companies that direct users to it have greatly affected the companies’ valuations.

In the Babylon-ironSource case, Yahoo’s sensitivity may say something the entire field, which has always trod the thin line between legitimate conduct and aggressive conduct of PC software tool providers. Yahoo alleges that “violations” were found among the products embedded in Babylon’s software tools by its business partners. These partners are software vendors who use Babylon’s engine to distribute ads and software, which do not always conform to Yahoo’s policy, on content sites.

Although the capital market is signaling its lack of confidence in Babylon, which might affect its merger with ironSource, it is premature to eulogize Babylon’s relations with both Yahoo and ironSource. This is because, in the end, Yahoo benefits from Babylon’s product, which directs users to Yahoo’s site, and it has a motive to try and solve the issue that jeopardizes the relationship. But Babylon, either before or after its merger with ironSource, will have to act more carefully to ensure that such incidents will not be repeated, and this caution is liable to affect its future business performance.

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