Has the deal of the year become a nightmare? part 2

Courtesy of an eagle-eyed reader, we now know that Geosign continues to cause issues for American Capital Strategies (NASDAQ:ACAS) following their US$160 million investment just a few short months ago. You might recall reading about this unfortunate VC mayhem here (see post “Has the deal of the year become a nightmare?“, June 25-07). This from the K-W Record:

“Owners split web operation

Guelph’s Geosign divided a year after $160 million investment

November 17, 2007
MATT WALCOFF
RECORD STAFF
GUELPH

Less than a year after investing $160 million US into Guelph entrepreneur Tim Nye’s Geosign Corp., American Capital Strategies Ltd. is parting ways with Nye. They will split the once-promising company between them.

American Capital is now the sole owner of Moxy Media, which has inherited 150 of Geosign’s employees and, according to its website, more than 300 of Geosign’s websites. Geosign president Ted Hastings remains at the helm of Moxy Media as president and chief executive officer of the new company.

A minority of Geosign’s websites and about 50 employees now fall under the umbrella of eMedia Interactive Inc., which Nye controls. TrueLocal, a search engine Nye owned, is also part of eMedia, according to company spokesperson Christa Rottelle.

Both companies remain in Guelph: Moxy Media in a former Geosign building on Imperial Road and eMedia on Southgate Drive.

The divorce ends a partnership established with much fanfare but which ran into problems almost right off the bat.

American Capital, one of the largest publicly traded private-equity firms in the U.S., bought a minority stake in Geosign in March. American Capital received two of five seats on Geosign’s board of directors.

At the time, Geosign was bragging of $100 million in annual revenue and ambitious expansion plans. The company, founded in 2000, was scooping up recent university and college grads wherever it could find them and reached nearly 250 employees by May.

The company published websites on dozens of topics as diverse as golf, cosmetic surgery, insurance, wheelchairs and massage therapy.

Some of the sites attracted substantial audiences with news articles, product reviews, blogs and videos.

But others were light on content and heavy on ads placed on behalf of such third parties as Google Inc. and Yahoo! Inc.

In May, Google told some of its users it was changing the rules of its advertising program as of June 1 to crack down on a process known as search-engine arbitrage.

Search-engine or Google arbitrage is a procedure that website owners use to exploit the difference between the cost of buying keyword ads on a search engine and the revenue generated from ads they agree to place on their websites.

By using inexpensive keyword advertisements on Google to attract Web surfers to a page full of third-party ads placed by Google, website owners could make a good deal of money without providing much content.

Geosign never acknowledged engaging in arbitrage, but it cut more than 50 staffers a few days before Google’s new policy went into effect.

EMedia split off from the former Geosign on Oct. 1, Rottelle said in an e-mail message.

Rottelle did not explain how eMedia and Moxy Media divvied up Geosign’s websites.”

One can only imagine how brutal this must have been for the investors. Perhaps the split was the only sensible way to avoid prolonged litigation over the reps and warranties on the original March 2007 US$160MM investment, US$50MM of which was rumoured to be in the form of a secondary by Geosign founder Tim Nye.

In unrelated but poorly-timed news, the US$7 billion American Capital just priced a US$160MM common share offering.

MRM