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Apr. 27, 2007 at 8:56am Eastern by Searcharazzi

Searcharazzi: Touring the SEM Graveyard

Let’s just get it out there: it appears that Zunch Communications, a Dallas-based SEM, has filed for bankruptcy.

While some might call this an isolated incident, some speculative minds suggest that a correction is on the horizon for SEM agencies. Indeed, Searcharazzi is dumbfounded by the hundreds of firms that have grown and multiplied during the early years of search, which traditionally means that the environment is ripe for consolidation. Take a quick tour of any Search Engine Strategies exhibitor hall and you will get the drift.

Let’s start with a tour of SEM and related acquisitions:

1998
Outrider acquired by WPP

2000
Website results acquired by 24/7

2003
iFrontier acquired by Avenue A
GoToast acquired by aQuantive

2004
SendTraffic acquired by Traffix
Marketleap acquired by Digital impact
Performics acquired by DoubleClick
Global Promoter acquired by Websourced
Decide Interactive acquired by 24/7
Rawhide acquired by eXact Advertising
iProspect acquired by ISOBAR

2005
Proceed acquired by Websourced
MarketSmart acquired by Websourced
SearchIgnite acquired by 360i
360i acquired by Interactive
FastClick acquired by ValueClick

2007
NewGate acquired by iCrossing
Spannerworks acquired by iCrossing
Reprise Media acquired by IPG
GSI acquired by Oglivy
Google agrees to buy DoubleClick
Fathom Online reportedly being shopped around

Yet another fate lies for those who are stuck on the idea that their firms have a much higher valuation than the market is demanding. Case in point: an unnamed West Coast-based SEM had been offered $60 million, but refused, insisting on $80 million. Some time later, an offer of $40 million was made, which was then refused, insisting on $60 million. Clearly, the longer one holds out for an ideal valuation (without increasing value), the less likely it is that such an offer will be made.

So on to the first in a new section of the SEM graveyard:

2007
Zunch Communications files for bankruptcy

Searcharazzi looks forward to your tips and will update these lists accordingly.

Postscript: James Sadler from Zunch Worldwide, which has assumed Zunch Communications assets and debts, sent this:

Here's the story of Zunch Worldwide and Zunch Communications. As you may know, in October 2005, several key executives left Zunch Communications, Inc. to form Kinetic-Results (which Kevin Ryan has since left and they've renamed themselves Dexterity Media).

That move cost Zunch Communications several large clients, including a $1 million+ a year client.

Essentially, Zunch Communications never fully recovered from that split. In what I think is going to be an increasingly common story for SEO and SEM companies, Zunch Communications fell further behind both in paying its obligations and in servicing its clients.

The company found itself on the receiving end of several lawsuits, and it lacked the funds to pursue arbitration with the former employees who left to form Kinetic. The hole they were in just got deeper-and-deeper.

In September 2006, things came to a head. Zunch Communications was sinking and no one could get the ship righted. It was kind of like the Titanic, the hole torn in it was too big to repair and was dragging the ship down. Although in this case, rather than a hole filling up with water, we had a hole that was bleeding.

After consulting with attorneys, it was decided that there was nothing that could be done but put Zunch Communications into bankruptcy. At first a Chapter 11 was considered, but the assessment was there weren't sufficient assets to make that a viable option.

Again acting on advice of counsel, a new entity was formed -- Zunch Worldwide, Inc. Zunch Worldwide planned to purchase certain assets and take over a few of Zunch Com's liabilities.

In order to do this on both a legal and ethical basis, an independent appraiser was retained to value Zunch Com. Based on his valuation of the assets, a purchase agreement was entered into wherein Zunch Worldwide assumed assets and some debts of Zunch Com.

Fortunately, Zunch Worldwide is in a much healthier position and has taken on a number of new clients. And Zunch China, Inc. was recently formed to service clients in China, several of whom have signed on with Zunch China and several others who are negotiating with Zunch China for services.

Both Zunch Worldwide and Zunch China are healthier, more viable entities.

Zunch Communications will remain an active entity until its bankruptcy winds down. The Trustee in bankruptcy will continue to collect on payments being made to Zunch Communications, primarily the purchase price of the assets Zunch Worldwide bought, which are being paid for over a period of time. That money will then be distributed to those creditors who file claims with the bankruptcy court.

It's tragic, but the timeline you developed and posted, together with your belief that a consolidation is coming, is probably dead on. I told a reporter yesterday that I though we were on the verge of seeing a number of SEO/SEM companies close their doors.

In my time in the industry, I've seen story after story of people leaving one SEM company to start their own. All too often, these people lack all the necessary tools and skills to make the company a success. And there are only so many clients with the money to pay for SEM services to go around.

Postscript 2: Is Zunch Communications' Bankruptcy a Sign of Things to Come? from Kevin Newcomb at Search Engine Watch focuses on how the Zunch refugees that went on to form Kinetics (later renamed Dexterity) have been successful despite supposedly bad market conditions. IE -- the Zunch downturn had little to do with that.

Certainly there's consolidation that will happen in the space, some of which is outlined above. But I don't know that looking closely at this one firm downturn is necessarily a sign that the industry is in trouble.

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