Ashley Madison: Abandoned at the altar

The story behind Bay Street's jilting of adultery website Ashley Madison.

Imagine owning a hot community of online social networks that generates plenty of profit and tons of free publicity, thanks to a high-profile flagship dating service with five million members. Now imagine merging this business with a much larger online media group that has many more, albeit less-known, properties. Then picture taking the combined outfit public in a market starved for hot IPOs. Sounds like a slam dunk, right? Well, not if you’re Noel Biderman, CEO of Avid Life Media. His bid to do exactly that sent Bay Street deal makers running for cover when he tried it in January.

If only Biderman ran a company like Varicent Software, a Toronto developer of sales-performance solutions that raised $35 million in the third quarter. As far as private IT transactions are concerned, only Facebook landed a bigger Q3 financing deal. “We had a good growth story to tell,” Varicent CEO Dan Shimmerman says, so institutional investors lined up, and Varicent inked a “great deal” with reputable firms, including GMP Capital’s private equity arm.

Avid Life’s potential also attracted GMP’s interest. But instead of hitting a home run, the firm’s investment bankers hit a brick wall when, in a prelude to an initial public offering, they tried to market a $60-million private placement that Biderman needed to acquire that other media company.

The problem wasn’t financials. In 2009, Avid Life posted a profit of $8 million (before interest, taxes, depreciation and amortization) on just $30 million in sales. Profit was up fourfold, despite the rough economy. And the story GMP was spinning to potential investors was that things would only get better once Avid Life used the new funds to acquire a larger, online advertising outfit, Moxey Media. That outfit, based in Guelph, Ont., had 2009 sales and earnings (before interest, taxes, depreciation and amortization) of $192 million and $27 million respectively. The combined entity would be more diversified, not to mention one of the largest digital media plays in Canada. And retail investors would be allowed in on the action because Biderman wanted to go public after the merger via a reverse takeover of a listed shell company on a Canadian exchange, which would provide an exit opportunity for institutional shareholders.

Still, there was an insurmountable hurdle: Avid Life’s ventures include Ashley Madison, a high-profile hookup service for married people looking for someone with whom they can have an affair, as well as two similar sites –, which exists to match young men with “sexually charged older women,” and, which aims to connect “attractive girls” with “generous benefactors.”

GMP didn’t expect too much trouble. After all, Biderman’s company is a legal business with clear investment potential, not to mention a talented leadership team.

And yet, the offering proved too hot for Bay Street to handle. In January, the papers reported that GMP was having trouble finding partners to help sell the Avid Life offering to big institutions. Then, on Feb. 1, with little explanation, GMP walked away from the deal. The sequence of events that led to that decision haven’t been fully reported until now, and they shed light on a dilemma that Bay Street still struggles with: Should morality matter in the markets?

When Canadian Business sat down with GMP CEO Kevin Sullivan for an exclusive interview on Jan. 29, he explained that his firm had no problem supporting Avid Life. Morality, he said, was the only thorny issue that GMP really had to worry about. Sullivan said his firm felt it was best to “let investors decide what’s appropriate.” By the end of the interview, however, it was also clear that the firm had breached its limit. The very next business day, GMP was out.

Biderman’s attempt to raise funds for Avid Life has divided and amused Canada’s financial community. “Everyone got a good chuckle watching GMP try to find a deal partner to share the heat on this one,” says one insider at another Toronto investment bank. According to Street jesters, the deal was dead before it started because no male fund manager in his right mind wants to go home and tell the wife, “I liked Ashley Madison so much that I decided to buy the company.” Bay Street spouses were said “to be worried about having their partners review Ashley Madison accounts in detail.”

But in reality, the Avid Life affair is hardly a laughing matter – either for the company or for the investment community at large. Biderman declined several requests for an interview, so what Avid Life plans next is unclear. Investors, meanwhile – at least those who agree with Milton Friedman, who said that one advantage of a free economy is that minorities, however unpopular, find businesses that will cater to their tastes – have been denied a potentially lucrative opportunity. After all, good investments are always few and far between, and market studies regularly indicate that companies that challenge social mores can be great buys – generating spectacular shareholder returns and public condemnation in equal measure.

Avid Life is used to rejection. And it doesn’t take a public relations expert to understand why the public transit authority in its hometown Toronto recently rejected a bid by Biderman’s company to market its adultery service on the side of streetcars – even with the much-publicized company offer to subsidize Toronto Transit Commission’s customer trolley rides.

The Ashley Madison motto is “Life is short: Have an affair.” As part of its service guarantee, the company offers a refund to anyone who can’t break their marriage vows within three months. One company commercial asks, “Trapped in a sexless marriage, or just want to mix up your play list? Join It’s way better than an intern.” Another ad shows a husband slinking away from a bed occupied by a sleeping, overweight wife while a voice-over states, “Most of us can recover from a one-night stand with the wrong woman, but not when it’s every night for the rest of our lives.” Enough said.

But investment banks are not public services. They exist to promote market opportunities, not social norms. And playing stocks that offend some market participants can be highly lucrative. As Eric Lansky, president of Dallas-based USA Mutuals, explains, “Sinful ventures typically come with great barriers to entry, little competition, almost monopolistic pricing power and strong, stable cash flow.” But don’t take his word for it – look up the Vice Fund (VICEX) that his company manages. It only invests in gaming, tobacco, alcohol and the military industrial complex. And it has blown away the S&P 500, not to mention the Ave Maria Catholic Values Fund (AVEMX), which limits itself to investments that do not violate church values or teachings. In the five-year-period prior to the collapse of Lehman Bros. in 2008, the Vice Fund generated an annualized 20.2% return compared to 11.3% for the S&P 500.

That makes perfect sense to Christopher Ma, a professor of applied investments at Stetson University in Florida. He says market data clearly show morality costs investors a lot by limiting the ability to diversify and putting too much money into overpriced companies that “waste shareholder value on looking noble.” Meanwhile, Ma says, “Ventures that play on human weaknesses typically outperform the market and are undervalued, especially for early investors.” As they perform overtime, he adds, they become less cheap because some investors get over their initial objections to making money.

According to Ma – who also runs an asset management firm – pre-IPO companies with “a great business model like Ashley Madison” could easily turn out to be a good investment for anyone who gets in early.

So what’s Bay Street’s problem? Simple. Risk management is on the rise and branching out into new territory. According to a global survey of businesses conducted by the Conference Board last year, 82% of respondents reported they were putting a substantial effort into limiting threats to their brands. And after watching what can happen on Twitter and YouTube, a growing number of them are now considering reputational risks during the preparation and execution of new strategies and projects.

Big Canadian banks and major investment funds are among the early adopters of this trend. As a result, says a top-tier Toronto money manager, they “won’t mess around.” Independent dealers, on the other hand, can “be looser” with reputational risk.

Enter GMP. When the firm first took the deal to the Street, there was some talk that it was only doing so because some GMP employees have a pre-existing personal stake in Biderman’s company. But according to Sullivan, nobody involved in his firm’s initial decision to market the controversial private placement owns a stake. Whatever the case, it’s hard to deny that Bay Street’s rejection of the offering reflects a certain amount of hypocrisy, given some of the other businesses it supports without batting an eyelash. Nobody makes that point better than Tela Andrews, Ashley Madison’s vice-president of sales. And he doesn’t even have to say a word because his bio says it all. Andrews began his career at Yahoo, where he helped generate traffic for adult-content sites. Despite that association, Bay Street deal makers would fall over themselves to help a U.S. digital media giant like Yahoo raise cash.

“Good for GMP for supporting a viable business,” says one anything-legal-goes capitalist who insists backing Ashley Madison is less offensive than the existence of government-run casinos or liquor stores. But billionaire Canadian fund manager Stephen Jarislowski disagrees. “I don’t mind investing in liquor,” he says, “because without it, you’d miss something in life. I tell friends to stop smoking, and I still buy tobacco companies. But Ashley Madison shouldn’t be a public venture, because it can destroy families. And there is nothing worse than the effect of divorce on children. There are thousands of other stocks to buy, so why bother with this crap?”

Deborah Allan, director of communications with the Ontario Teachers’ Pension Plan, also sees Biderman’s company as a special case. “We are prohibited from putting a social screen on our investments,” she says, so Teachers’ could theoretically invest in Avid Life – if the deal was active and big enough. “But we look at every avenue of potential upside and downside,” so Allan suspects reputational risk and Teachers’ lack of experience in the adultery business would have kept the fund out even if Avid Life met the fund’s primary criteria.

“There are two conflicting issues here,” says Lindsay Thompson, who teaches leadership ethics at the Johns Hopkins Carey Business School. “The first is freedom of the market and whether or not funding should be made available to entrepreneurs based upon anyone’s idea of virtue or vice. The second issue is the role of persuasion and conscience, which are supposed to influence decisions in a free society.”

Thompson says you could argue the market simply found some form of consequence that makes financing Avid Life a bad idea. But the professor – who recently published Moral Compass, a leadership handbook that deals with decision-making in a world of divergent moral standards – can’t see any real difference between investing in Ashley Madison and any typical sin stock. She suspects some form of personal risk avoidance is in play along with reputational risk management. “Nobody thinks their husband or wife or partner is an alcoholic if they invest in a Seagram,” she says. “But I am not so sure that people react the same laid-back way to spousal support for an infidelity service.”

Biderman only has himself to blame for facing rejection on Bay Street. Like, the social network for pretty people that recently generated publicity by giving the boot to members who gained weight over the holidays, his company actively pushes hot buttons. And as its front man, Biderman – who describes himself as a faithful family man, while insisting monogamy is not part of human DNA – obviously enjoys stirring the social pot.

Every chance he gets, Avid Life’s CEO generates publicity by defending how Ashley Madison makes money. He says he doesn’t need to convince married people to fool around. “It’s a decision they’ve come to already,” he told a Los Angeles Times columnist last year. “All I’m saying is, don’t do it in the workplace where it could result in someone losing their job, don’t go to a singles dating service and lie about your status, don’t hire a prostitute.”

For men, Biderman bills Ashley Madison as a marital aid. If females give Ashley Madison a chance, he insists, it can restore a lost sense of self-worth “when Valentine’s Day gets forgotten.”

But some women join Ashley Madison looking for more than an ego boost – a fact that clearly caught GMP’s CEO Sullivan off-guard during his interview with Canadian Business. So off-guard, that the firm’s abrupt cancellation of its sales efforts the next business day came as less of a shock to this magazine than it did to the Street. Specifically, Sullivan immediately stopped voicing support for Avid Life after being read the following Ashley Madison user’s posting: ” To be honest I’m really looking for a sugar daddy, so if that isn’t you I wouldn’t wasteyour time replying. I’m looking for a generous man that loves to take care of a younger lady, i am 18 and have just started university and my parents aren’t paying a cent for it (when i say parents I mean my mother, i have no clue where my father is these days) So if there is a nicer gentlemen on here that really gets off on helping a young women with some bills, taking stress of her shoulders while recieveing the same back both emotionaly and physically please msg me.

When asked what he made of it, Sullivan said GMP would need to re-examine the Avid Life deal before commenting further. The next business day, Rocco Colella, GMP’s director of investor relations, called to say the Avid Life offering “is now dead from our perspective.” He cited market conditions as “the primary factor.” But he did not dispute the fact that economic realities hadn’t changed that much over the weekend.

Shortly after, lawyers working for Biderman’s company sent along a letter to this magazine, which noted the company’s services are governed by a robust set of terms and conditions, which dictate, among other things, that users must be at least 18 years of age and that illegal activity, including prostitution, is expressly forbidden. The fact that Biderman declined our request for an interview to discuss the situation further was disappointing, if only because, before the financing hiccup, Caitlyn Coverly, one of Ashley Madison’s publicists, had e-mailed Canadian Business to suggest a feature on her boss, stressing that Ashley Madison is a very successful business. “While some may have their negative opinions about what we do,” she wrote, “it doesn’t change the fact that our CEO had an idea and transformed that idea into a very profitable business within 8 years.”

Coverly is right. So the next time Biderman tries to attract institutional investors, perhaps he’ll want to tone down Ashley Madison’s in-your-face marketing to raise Bay Street’s comfort level. In the meantime, he might also think about picking up a copy of Graham Greene’s The End of the Affair, a tragic story about a heated fling that was cut short by a bomb during the Second Word War. It clearly shows relationships based on infidelity can blow up quickly – just like Avid Life’s fundraising partnership with GMP.