crooked road

The $1.1 billion bid Endurance International, a Burlington, Mass.-based web hosting company, is making for Constant Contact is big — so big that possible legal challenges have emerged within 24 hours of the deal's announcement.

To be sure, there is a strong case to be made that these legal threats should not be held against the fundamentals of the deal. When there is big money at stake, merger objections often follow very quickly, especially in public-to-public deals.

Also, public companies are not inclined to come out swinging with grandiose rebuttals during such periods, so on-the-record explanations are not likely to be forthcoming.

That said, it's too soon to say whether these challenges will have legs and if a suit will be filed.

Questionable Synergies

It also must be noted that questions about the deal's possible synergies emerged almost from the beginning of the surprise announcement.

Endurance shares dropped by about 20 percent in no small part, one could assume, because it is financing the entire transaction with debt.

So the big question: how does this deal make sense?

Endurance is a web hosting company for small businesses. Waltham, Mass-based Constant Contact is a provider of cloud-based digital marketing solutions spanning email, social and mobile channels for the small and midsize business (SMB) market.

Small Business Marketing + Web Presence

Endurance's position is that a combo of web hosting services and online marketing will create a small business destination for companies seeking a one-stop-shop for both sets of services.

Constant Contact's "focus on the customer and product development complements our offerings for small business services, and expands our ability to address the needs of SMBs," said Hari Ravichandran, president and chief executive officer of Endurance.

"We know that once small businesses have a web presence, they look for other products and services that will help them to grow their business."

However, in a research note cited by Reuters, Cowen analyst Gregg Moskowitz said that revenue synergies of the deal look limited. He also wondered questioned how many of Endurance's small business customers will be willing to pay for Constant Contact's solutions.

In response to a question from CMSWire about the research note, Ravichandran said in an emailed comment that the synergies discussed during the call yesterday were based on the cost side. "We see potential synergies on the revenue side not only from our subscribers but from our channels as well," he said.

"Our partnership over the last six months has shown positive results with our existing subscriber base. We also believe we can market their product through our channels and bring new subscribers on platform with lower subscriber acquisition costs. Again, the $55 million in synergies presented during our call assumes no revenue synergies."

Routine Hurdles?

Such deals must jump through routine hurdles before they close and this one is no different. Pro forma, Endurance included in its announcement that the transaction, which is expected to close during the first quarter of 2016, is still subject to Constant Contact shareholder approval, and other customary closing conditions, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act.

Constant Contact shareholders will vote on the proposed transaction at a special meeting whose date is not yet announced.

Now, we can add to the timeline the potential legal challenges. In other words, those small business customers identified by Endurance — the ones seeking the one-stop shop of web hosting and online marketing services — should prepare for a wait that is possibly longer than the first quarter of 2016. Possibly.

Title image by George Nietsch