The factors behind WebMD's sale attempt

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News of WebMD's planned sale—since aborted—surprised many observers. Sure, business was soft, and the online healthcare behemoth treaded water through the second half of 2011, but should that be enough to send the portal into the arms of a private equity firm? And what are the implications for other companies dependent on pharma advertising, if it's that bad for WebMD?

In reporting dismal third-quarter revenues, the portal cited disappointing advertising from biopharma, which typically ramps up spend toward the end of the year to burn off unspent ad budgets. Not this year, said WebMD: “revenue contribution of third-quarter sales to fourth-quarter revenue is expected to be less than anticipated,” its Q3 results advised, “primarily as a result of a more cautious business outlook by large customers.” Still, the firm projected full-year revenues up in the 3-5% range, though the second-half dive in advertising bodes ill for 2012.

“With the pharmaceutical industry spend on digital marketing stuck at 5%, we understand our mission and will intensify our effort to roll out new products as well as demonstrate to our customers the unique WebMD capabilities that we believe will provide superior return on their marketing investment,” said WebMD chairman Martin Wygod at the time.

Privately held WebMD competitor Everyday Health does not release performance figures, but with so many mass-market brands losing patent protection, a parallel plunge in ad spend wouldn't come as a surprise. And as there's no reason to expect an improvement in conditions soon, WebMD may try to make big changes to its business model—changes that could rattle investors, says Tom O'Connor, managing director of media banker Berkery Noyes.

“It's tough to grow in this space,” O'Connor said.  “They may need to go private to do some heavy lifting that wouldn't look good for a public company.”

That could mean reducing their exposure to ad-supported media by moving to a more “Software as a service”-centric hosted or recurring revenue model or making big acquisitions, said O'Connor.

“Everyday Health has taken a lot of money on and they're acquiring and doing a lot of things WebMD needs to do to grow,” he added.

Going private would have removed the short-term, quarter-to-quarter pressure, letting the principals focus on the firm's core business, weather a few tough years and emerge on the other side with a profitable sale. It would also have protected them from investors like Carl Icahn, who has recently ramped up his holdings in WebMD. In November, management pushed through a “poison pill” stock purchase rights plan “designed to deter coercive takeover tactics” by limiting stock ownership.

WebMD did not give a reason for shutting down sale talks, but it seems safe to assume they didn't get the price they wanted. Given those dismal revenue figures and ugly short-term prospects for pharma and consumer health ad spend, that wouldn't be a shocker.

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