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Demand Media IPO priced at $17, above expectations

January 25, 2011 |  5:52 pm

Demand Media Inc., the Santa Monica mass producer of Web content, late Tuesday priced its initial public stock offering at $17 a share, above expectations, and sold 19% more shares than anticipated.

The IPO values the company at just under $1.5 billion.

Demand Media had initially expected to sell 7.5 million shares at between $14 and $16 each, but investor interest was strong enough to allow the firm's brokerage underwriters to lift the deal to 8.9 million shares at $17 each. The offering raised $151 million, split about half-and-half between the company and selling stockholders.

"It’s generally positive when deals price above their range," said Ben Holmes, an IPO analyst with Morningnotes.com in Boulder, Colo. "They had more orders for shares than they expected."

Demandlogo Demand Media is the second U.S. IPO of the year, and the first technology offering. The deal comes amid what have been sharp gains in many big-name tech shares in recent months, including Apple Inc. and Google Inc., so Wall Street is eager to see how investors treat the stock when it begins trading on the New York Stock Exchange on Wednesday under the ticker symbol DMD.

Last year's tech IPOs were dominated by Chinese companies, many of which soared on their first trading days.

"Investors loved Chinese tech companies last year," Holmes said, citing ChinaCache International, which rocketed 95% on its first day of trading last October, and ECommerce China DangDang Inc., which surged 87% in its debut in December. "This will be a nice test to see if they feel the same for American companies."

In its prospectus for the stock sale, Demand Media said it posted $3 million in losses on $179 million in revenue for the first nine months of 2010. It estimated fourth-quarter revenue to be between $71.5 million and $73.5 million, with a bottom line somewhere between a net loss of $1.9 million and a profit of $600,000.

The company had posted a $30-million net loss on $198 million in revenue in 2009.

Demand Media doesn't command much respect from the journalism elite, many of whom regard the company's approach as the industry equivalent of fast food. Its army of 13,000 freelance writers and video producers are paid around $20 for each article or video on a range of topics most likely to lure Web traffic -- such as how to fold a paper airplane or how to start a compost pile.

The strategy has worked so far: Demand's websites, including eHow.com and answerbag.com, attracted 107 million visitors in November, making the firm overall the 17th largest online property that month, according to ComScore.

But Demand's performance is heavily dependent on how search engines such as Google rank the company's articles. For now, the content often crops up on the first page of search results when users type in common queries, such as "headache cures" or "jewelry making."

But in a blog post last week Google declared war on "search engine spam," and indicated that it would try to steer people to higher-quality content, giving more weight to sources that have more than just a paragraph or two on the topic.

That threat didn't appear to deter buyers in the IPO Tuesday.

-- Alex Pham

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