Behind the Habeas Fire Sale

After months of speculation as to who would buy ailing Habeas, Return Path announced today it would purchase its e-mail deliverability rival.

The price? At most, $4 million, according to sources at various companies that looked at Habeas and passed on the deal.

It was widely known in e-mail marketing circles that investment banking firm William Blair & Co. had been shopping Habeas around since at least May. William Blair & Co. approached many potential suitors including Habeas’s competitors and various e-mail service providers, sources said.

According to documents from William Blair obtained by this newsletter, Habeas’s revenue in 2007 was $5.1 million and the company had yet to break even.

Unprofitable technology firms tend to go for from three to five times annual revenue, according to sources.

As a result, the original asking price for Habeas was around $20 million, sources said. However, they added, Habeas was selling its services at prices too low to ever turn a profit.

“They were bleeding money” to the tune of millions of dollars a year, said one source who asked not to be identified.

Habeas’s investors also apparently made it a little too clear they wanted out of the deliverability business.

“They telegraphed: ‘We want out and we want out now,’” said another source.

Habeas dropped its price repeatedly, according to sources, and the last known asking price before the deal with Return Path was announced was $4 million. It is known only to the parties involved in the transaction whether Return Path ended up paying the full $4 million or not.

Those who were monitoring the situation suspect Return Path most likely paid less than $4 million because there was no one else bidding on the firm.

“Those VCs [Habeas’s venture capitalist investors] took a bath,” said one source.

Various sources also speculated that Return Path agreed to the deal because Habeas’s pricing was so low, it was putting unreasonable downward price pressure on its competitors and the purchase simply takes Habeas out of the picture.

In any case, Habeas has between 400 and 500 clients, just over 40 employees in the U.S., and some outsourcing operations in India.

As a result of the purchase, Des Cahill and Chuck Swenberg, Habeas’s CEO and vice president of sales and business development, respectively, will leave the company after an unspecified transition period, said Matt Blumberg, chief executive of Return Path.

“There’s no reason for two CEOs and two vice presidents of sales,” said Blumberg. “But beyond the transition period, those two in particular will be advisors to the business.”

When asked if Habeas’s clients can expect to see their prices rise as their current contracts run out, Blumberg said: “No, not for the same thing they’re getting today. Clients will have the opportunity to access a broader range of tools and services, and for those they may pay more, but we’re not going to be doing any price increases on either side.”

Among Habeas’s services that compete with Return Path’s is Email Monitor, a Web-based service that allows senders to monitor the deliverability of their e-mail campaigns. To eliminate the overlap, Return Path will migrate Habeas’s Email Monitor customers onto Return Path’s Sender Score monitoring platform, said Blumberg.

Habeas also has another competing product, SafeList, a whitelist of senders who Habeas has certified as non-spammers that anti-spam-technology and e-mail-inbox providers can check against to help them determine if messages are spam.

Return Path plans to run the SafeList as a separate unit from its own similar offering, Sender Score Certified.

“They have different ISPs and filters that query them, they have different senders on them and they have different standards for application approval and compliance,” said Blumberg. “We think there’s value in both. Now, we may in the very long term combine them or do something different with them, but clients and ISPs can expect it’s going to be business as usual with them for the indefinite future.”

Habeas was founded in 2002 by anti-spam activist and attorney Anne Mitchell. The company’s original business model was based on a copyrighted haiku, a form of Japanese poetry. Habeas’s marketing clients would contractually agree not to spam and buy the right to insert the haiku into their headers so their messages could be readily identified as wanted by ISPs and anti-spam technology firms.

The model didn’t work however, and Habeas abandoned the haiku in 2004.

Mitchell, who was ousted from Habeas in 2003 and now runs the SuretyMail e-mail accreditation program, praised the Return Path deal.

“While the Habeas that I founded and ran as CEO during its first year bears almost no resemblance to the Habeas that Return Path is acquiring, I have no doubt in Return Path's ability to find and rekindle the best parts of what Habeas has to offer,” she said.

In a blog post on GettingEmailDelivered.com, Mitchell made clear she didn’t like what the company she founded had been transformed into, though she didn’t specify why.

“The Habeas which Return Path has just acquired is not the Habeas which I founded, not the Habeas of which I was CEO,” she wrote. “They had evolved into something that bore the same name—had the same DNA—but had grown into something unrecognizable, and at times something that not even this mother could love.

“By bringing Habeas into the house of Blumberg, I believe that the good that Habeas had to offer will have the opportunity to be cultivated and embraced, with the less appealing attributes that it had developed being left behind with the paperwork.”

The deal between Habeas and Return Path is expected to close the week of August 18.