IronSource Freezes Merger With Babylon Until Yahoo! Claims Resolved

Yahoo! accusations of contract violations sends Babylon shares into tailspin, threatening to upset merger terms.

The Internet software distributor IronSource has put merger talks with Babylon on hold while it awaits further developments in the online translation company's violations of its contract with Yahoo!.

IronSource executives have expressed concern that Yahoo may terminate its agreement with Babylon if the violations aren't rectified. Meanwhile Babylon and Yahoo are engaged in intensive talks aimed at resolving the problems.

"We're waiting to see what will happen with Yahoo's investigation and how the findings will affect its relations with Babylon," said IronSource CEO Tomer Bar Zeev. Babylon declined to respond.

Babylon's contract with the U.S.-based web portal and search engine company was thrown into doubt after it was discovered that Babylon inserted ads from its customers into Yahoo web pages in violation of the agreement between the two companies. Yahoo also alleges evidence of so-called "click fraud" in the form of automated fake user traffic to Yahoo to boost revenues of companies working with Babylon.

The Yahoo contract is critical for Babylon, which earned NIS 52 million in revenues from Yahoo, or close to a third of its total in the second quarter. News of the Yahoo allegations has wiped out nearly a third of Babylon's market capitalization on the Tel Aviv Stock Exchange to some NIS 964 million. On Sunday, Babylon shares closed down another 4% to NIS 18.55.

IronSource, whose main product is installation software used by many of the world's most popular downloading websites, is closely held. The sharp drop in Babylon's market cap could affect the terms of the merger, which was announced in principle in August. Based on their valuations at the time, industry sources said IronSource’s shareholders would get 67% of the merged company.

Babylon's troubles began 10 days ago when Yahoo informed it that their agreement would be terminated immediately if the contract violations weren't corrected. That prompted a round of talks to resolve the crisis, and last Tuesday Babylon assured investors that its contract with Yahoo still remained in force while it was investigating the violations. In the meantime, the company said it was cutting new-customer-acquisition outlays by 70%, a move aimed at avoiding further contract breaches but will also impinge on revenues going froward.

No official statement has been issued by Babylon about any suspension of merger talks with IronSource. But the fact that the merger hasn't been cancelled altogether is attributed to the strong personal ties between the controlling shareholders of the two companies, Noam Lanir of Babylon and Bar Zeev, Roey Eyal and Itay Milrad of IronSource.

The original merger plan was believed to have called for a two-to-one ratio in favor of IronSource, giving IronSource owners 67% of the merged company and Babylon owners a 33% stake, but this ratio is bound to change if the merger still goes through.

Ofer Vaknin