Digital Impact Buys Search Marketer Marketleap for $3.8 Million

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E-mail service provider Digital Impact jumpstarted its entry into search marketing yesterday with a deal to buy Marketleap, a San Francisco-based search engine marketing firm. The deal is worth at least $3.8 million.

Digital Impact said it would launch a search marketing service in April. The company hired Michael Gorman, a former ESPN executive, to head the operation that complements its e-mail services.

The agreement calls for Digital Impact to pay $1.5 million in cash and 1.25 million shares of its stock, valuing the deal at $3.8 million, based on Digital Impact's stock price at Friday's close. Marketleap shareholders will receive another 200,000 shares based on sales targets for the next year. The deal was set to close yesterday.

Marketleap, which was founded in 1999, provides clients with services in search engine optimization, paid inclusion and paid placement. It brings Digital Impact a client list that includes Kaiser Permanente and SBC's

Digital Impact's expansion into search marketing comes as its e-mail business continues to suffer from the effects of spam. The company's revenues shrank 5 percent last fiscal quarter compared to a last year. Digital Impact blamed the downturn on longer sales cycles and decreased mail volume.

Gorman said the addition of nine-employee Marketleap would allow Digital Impact to offer an array of customer acquisition and retention services.

"There's been a lot of focus on search as a medium to get leads," he said. "Our focus is to take people at that early stage to bring them all the way through [the sales cycle]."

Gorman said Digital Impact would soon offer an integrated service, using search optimization, paid inclusion, paid placement and e-mail.

Marketleap's founders, Noel McMichael and Paul Owen, will join Digital Impact and report to Gorman. Digital Impact said it expects Marketleap to add $1.5 million in sales over the rest of fiscal 2005, which ends March 31, 2005.

Search marketing remains a fragmented sector, consisting of hundreds of small search marketing firms helping companies create and manage campaigns that run on Google, Overture and other search providers. Digital Impact's search service will compete with offerings from search engine marketing firms such as iProspect, and iCrossing.

Unlike DoubleClick and aQuantive, Digital Impact chose to invest in the services side of search marketing over the technology portion of the sector.

"We look at that as an early-today software play that's going to be commoditized," Digital Impact CEO William Park told investors during a conference call.

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