Retrospective: Google’s $102 Million Acquisition of Applied Semantics

Deal Overview

On April 23rd 2003 Google announced that it had acquired Applied Semantics in a cash and pre-IPO stock transaction valued at $102 million. The acquisition has proven to be one of the most successful in Google’s history with it laying the groundwork for Google’s future dominance in online advertising.

Acquirer: Google

Target: Applied Semantics

Total Transaction Size: $102M

Closed Date: 23rd April 2003

Company Details: Acquirer – Google

Google was founded by Larry Page and Sergey Brin in 1998 with the mission to “organise the world’s information and make it universally accessible and useful”. Google’s early success was driven by the PageRank algorithm which ranked web pages based on their relevance as determined by the number of quality links pointing to them, this was a significant improvement over the algorithms used by other search engines of the day. By the early 2000s Google had become one of the most popular search engines in the world handling hundreds of millions of search queries per day. Google’s revenue was growing rapidly by 2003, primarily driven by advertising through its AdWords platform, launched in 2000. AdWords allowed advertisers to bid on keywords and display text-based ads on Google’s search results pages.
Founded: 1998

CEO: Eric Schmidt

LTM Revenue: $646M

LTM EBITDA: $256M

Company Details: Target – Applied Semantics

Applied Semantics, originally Oingo, was founded in 1998 by Adam Weissman and brothers Gil and Eytan Elbaz. The mission of the company was to develop technologies that could understand and analyse the meaning of words and phrases on the web with the goal of improving the relevance and accuracy of search results and online advertising by leveraging semantic analysis. Applied Semantics product range included AdSense, a program which used semantic analysis of web content to serve contextually relevant ads, and DomainPark, a product which enabled domain owners to generate revenue by placing contextually relevant ads on parked domain pages, these ads were chosen based on the semantic content of the domain name. These products were enabled by Applied Semantics’ core technology platform called CIRCA (Contextual Intelligence and Recognition of Content Associations). CIRCA enabled Applied Semantics to become a pioneer in contextual advertising with the technology providing a breakthrough in understanding and leveraging the meaning of text on the web. Before this acquisition Applied Semantics had developed a strong market presence in the nascent online advertising market.

Founded: 1998

CEO: Eytan Elbaz

Motivation

In the first quarter of 2003 Google generated $248mn in revenue primarily through its AdWords platform, it had also recently launched Content Targeting Advertising in March 2003, this was Google’s direct competitor to AdSense. By acquiring Applied Semantics Google aimed to integrate Applied Semantics’ industry leading CIRCA technology to enhance its ability to serve contextually relevant ads. This would allow content publishers to monetize their content more effectively and website owners to provide a more seamless experience for users. Google hoped that by having the most effective web advertising platform content publishers would continue to migrate to advertising on Google.

By 2003 both Yahoo! and Microsoft were investing heavily in their contextual advertising platforms. At the time of the acquisition Applied Semantics had developed an industry leading team of experts in semantic technology. Through the acquisition of Applied Semantics, Google aimed to integrate the team to allow Google to continue to lead on innovation to maintain its technical edge in contextual advertising.

Through the acquisition of Applied Semantics Google hoped to create a comprehensive advertising ecosystem. By offering both AdWords and AdSense, Google would be able to offer advertisers the ability to reach users through both search and on the end web pages thereby creating a more consistent experience for advertisers. Google hoped that this would position them well to capture a large portion of the Contextual Advertising market as cost sensitive advertisers searched for integrated solutions for their advertising needs.

"Applied Semantics is a proven innovator in semantic text processing and online advertising. This acquisition will enable Google to create new technologies that make online advertising more useful to users, publishers, and advertisers alike." - Sergey Brin, Google Co-Founder

Integration

Following the acquisition Applied Semantics’ senior leadership and engineering teams joined Google and became Google Santa Monica. Gil Elbaz became Engineering Director of Google Santa Monica and Eytan Elbaz served as Head of Domain Channel.

The old Applied Semantics team and the Google team worked together to integrate CIRCA into Google’s technology, this product was called AdSense. Over the coming years AdSense was expanded to allow video content and integrated with new Google products including Gmail, Google Maps and YouTube.

Outcome

Google’s acquisition of Applied Semantics has proven to be one of the most successful acquisitions in Google’s history. As web usage proliferated in the 2000s and 2010s the effectiveness of AdSense’s industry leading contextual advertising technology, integrated with the rest of Google’s advertising ecosystem, allowed Google to capture a large portion of the online advertising market causing Google’s revenue to surge. By March 2005 AdSense accounted for an estimated 15% of Google’s total revenue and by 2022 Google’s advertising revenue amounted to $54.7bn, 39% of worldwide digital advertising revenues.

Google’s acquisition of Applied Semantics had a large impact on the development of future Google products. In part due to the expertise acquired from Applied Semantics and the success of contextual understanding, Google invested in Natural Language Processing and Machine Learning long before the rest of the business world began to do so, these investments led to improvements in Google’s search engine and other products and culminated in the formation of Google Brain in 2011 and the acquisition of Deep Mind in 2014.  

The House View

In our view, Google’s acquisition of Applied Semantics demonstrated some of the most desirable qualities of an M&A deal. When considering the acquisition, the motivations for Google were clear, Applied Semantics’ products were a natural fit for Google’s business model, with AdSense and AdWords forming a cohesive advertising ecosystem, and Applied Semantics’ industry leading technology provided a clear improvement for Google’s contextual advertising offering. Additionally, following the acquisition Google successfully integrated the Applied Semantics’ team, recognising the depth of talent Google had acquired and the strength of Applied Semantics’ leadership team, Google nurtured what had already proven to be a winning formula laying the groundwork for Google’s future dominance in web advertising.

Google has successfully used the playbook of acquiring industry leading companies and allowing those acquisitions to flourish whilst integrating their innovations into Google products several times in the past 2 decades, perhaps most notably with its acquisition of DeepMind which now seems set to lead Google into the age of AI.

N.B. At the time of this acquisition both Google and Applied Semantics were private companies so full financial data was unavailable for this article