Rediff.com shareholders have approved the purchase of Vubites, a local TV advertising firm founded by Rediff Chairman and CEO Ajit Balakrishnan. The acquisition is expected to be completed before December 10th, 2010. Balakrishnan, who founded Vubites in 2005, and owns all but one share in Vubites, is set to receive Rs. 13.71 crore ($3.08 million) from the deal: Rs. 1.31 crore ($295,304) for the shares, and Rs. 12.4 crore ($2.79 million) for loans he has given to the company. Rs. 1.285 crore ($289,218) will be paid by Rediff in lieu of the stock options. The total cost of the acquisition for Rediff is Rs. 15 crore, or $3.37 million.

In our opinion, this is a bailout for Balakrishnan, and even though it does reduce the conflict of interest for him, we don’t buy his reasoning for why Vubites could not have been started by Rediff itself. As the founder and CEO of Rediff.com, it was his responsibility to seek out growth opportunities for Rediff.com, not start a company that could be acquired either by Rediff.com or Rediffusion, an advertising agency that he co-founded. Rs. 1.31 crore, and recovery of his investment, is a significant upside.

But, that’s that; For all you know, delivering advertising on TV via the Internet could end up being an important source of revenue for Rediff.com, which has been making losses for many quarters now. However, we think it’s unlikely to have an impact in the short term, and certainly isn’t a case of risk diversification.

Vubites Acquisition Press Release

Rediff.com India Limited (NasdaqGM: REDF) today announces the results of its Extra-ordinary General Meeting (EGM) of its shareholders held on November 26, 2010. At the EGM, Rediff’s shareholders unanimously approved all 3 resolutions presented for vote, including the resolution relating to the acquisition of Vubites. The acquisition is expected to be completed before December 10, 2010 and once completed will enable the Company to enter the Local TV-Ad market using internet technology.

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