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Summary:

When blogging pioneer Six Apart said it was being purchased by ad network VideoEgg the deal seemed to confirm that the once-hot startup had been left in the dust by competition from the likes of WordPress, Twitter and Facebook. The merger documents tell a sad tale.

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When blogging pioneer Six Apart announced in September that it was being purchased by ad network VideoEgg and being folded into a new company, Say Media, the deal confirmed what many had been saying for some time: the once-hot startup had been left in the dust by competition from the likes of WordPress (see disclosure statement below), Twitter and Facebook.

For a few years during the Web 2.0 boom, Six Apart seemed like it was heading for major league success: Its founders made the cover of Fortuneit raised more than $22 million in funding, signed a string of deals with major media companies and brought in tens of millions of dollars in revenue through its TypePad platform. It even made some canny transactions — such as buying and then selling competitor LiveJournal for what insiders say was around $25 million in profit.

But all that money seems to have been burned up as the company struggled to stay relevant. According to merger documents shown to me by a source, Six Apart’s finances had become so bad that it was even forced to ask VideoEgg for a $2 million loan just to help it stay afloat while the deal was prepared.

In more than 100 pages of documentation sent out to the Six Apart shareholders ahead of a legal hearing due on Wednesday, the merger details are laid out in full. Highlights include:

  • Six Apart executives asked for a $2 million bridge loan from VideoEgg to help pay “liabilities and operating expenses” in the run up to the merger announcement. This goes beyond third-party expenses, and presumably included cash for items such as salaries.
  • The purchase is an all-stock deal valued that values the assets at around $3.9 million, marking a major writedown for those who invested $22.6 million in the company between 2003 and 2006 — and it doesn’t include the bridge loan.
  • In addition, the merger agreement contains a clause that reduces the purchase value of Six Apart each day until the deal is completed, chopping as much as $200,000 more off the price if the deal isn’t complete by the new year.
  • VideoEgg and Six Apart shareholders will take a 72/28 split of Say Media. One fifth of Six Apart’s portion will go to executives Ben Trott (who founded the company with his wife, Mena), Andrew Anker and Jeff Ash. The rest is distributed among the rest of the Six Apart’s shareholders.
  • In a typical move, David Hornik of August Capital, the investor who pumped millions into both companies and sat on both boards, was recused from the committee considering the merger — but so was Mena Trott, Six Apart’s other co-founder.

All in all, the files make for a depressing read — and mark a soggy end for a company once dubbed “the blogger’s weapon of choice”.

A fairness hearing on the merger will be held in San Francisco on Wednesday. Neither company had any comment on the deal’s specifics.

Disclosure: Automattic, the maker of WordPress.com, is backed by True Ventures, a venture capital firm that is an investor in the parent company of this blog, Giga Omni Media. Om Malik, founder of Giga Omni Media, is also a venture partner at True.

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By Bobbie Johnson
  1. Let ‘em die. Six Apart turned its back on the very core audience that helped build Movable Type. They thought there were better customers to have than independent bloggers, so they pursued the corporate crowd and abandoned us.

    Turns out that the corporate guys had other options and WordPress stepped up to accommodate those of us who had once been MT customers.

    They screwed up by ignoring their most ardent fans. I can’t say I’m sorry to see this company go down the tubes.

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  2. [...] by Six Apart, regarding its merger, signal the bursting of the Web. 2.0 bubble?1 Commentsrc:  http://gigaom.com/2010/11/16/str…Bobby Stars • Insert a dynamic date hereCannot add comment at this [...]

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  3. I guess anil dash knew when to get out. Yakking about your company 24/7 not getting the job done? Screw ‘em.

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  4. I’m surprised Video Egg would dilute themselves so heavily for SixApart, a company that clearly had insufficient revenue, lost traction and almost no valuable technology.

    Furthermore to my point, valuing SA at $3.9 million for 28% of the new entity doesn’t bode well for what we’ve read about Video Egg’s reported success and run rate. That puts Video Egg’s valuation at about $14 million which sounds surprisingly low.

    It was my understanding that Video Egg was on a tear, but clearly that’s not the case. If they are, this was a terrible deal for Video Egg shareholders, except of course for those who also had SA stock. If I was a Video Egg employee I’d be PISSED.

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  5. I’m not exactly clear how you decided to use the word “begged” in the headline other than trying to be malicious. There’s nothing in the investor documents that reflects begging.

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  6. Video Egg took $18m in VC (including WPP investment x 2) in 2007. Now it’s worth $14m reading between the lines.

    Wonder how these deals were devised … surely not based on EBIT or revenues.

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  7. I have the same document, and when I run the numbers, I get values for Six Apart and VideoEgg that are substantially higher than what the author of this post says. It seems he’s valuing post-merger SAY shares at only $0.24/share, whereas in reality it’s 3x to 4x that number. Either that, or some other major math error was made… please check your numbers, guys!

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  8. The key thing that Six Apart missed in my opinion – not recognizing they were in the advertising space vs. being a CMS provider.

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  9. “Journalists” who don’t understand deal docs are indeed dangerous. If you do your research, you will find your analysis of the valuation makes no sense. Investigate and be responsible with your words.

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  10. Thanks for the comments — I’m the author of the story. To wtfmath and Insider Bob: I did realise that the inclusion of the 3.9m figure would be misinterpreted as the sale price, hence the tweak to point out that was the value of the *assets* as outlined in the docs, not the value of the deal itself. Six Apart had $4m in working capital.

    The final sale price was less straightforward (since the value is not yet finalised and there was the fairness hearing to go through) which is why I didn’t include it. I don’t have the paperwork in front of me now, but from memory your ball park figures are right: Six Apart was aiming for a roughly $12-16 million valuation.

    Still a big old writedown for the investors in a company that had high revenues and significant M&A income.

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