JULY 17, 2003
TECH KNOWLEDGE
By Scott Kessler
Dot-Coms Choose Their Partners | Web companies are scooping up smaller counterparts to boost growth, beat the competition, and expand overseas
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As the weather has heated up, so too has merger and acquisition activity in the Internet sector. In March, InterActiveCorp (IACI ) (formerly known as USA Interactive) announced it would purchase Expedia (EXPE ), and Yahoo! (YHOO ) acquired Inktomi. In April, Overture Services (OVER ) acquired the Web-search unit of Norway's Fast Search & Transfer and a week later also purchased Alta Vista. RealNetworks (RNWK ) announced its deal to acquire Listen.com.
Then in May, InterActiveCorp said it would buy LendingTree (TREE ), Roxio (ROXI ) purchased Pressplay, and Telefonica (TEF ) announced it would acquire Terra Lycos (TRLY ). In June, paid-search advertising outfits FindWhat.com (FWHT ) and Espotting Media agreed to merge, and InterActiveCorp bought Hotels.com. And on Monday, July 14, Yahoo announced that it would purchase Overture Services.
That's a deal almost every 10 days, in predominantly three segments: online music, search, and travel services. Rather than go through the specifics of each transaction, we thought it would be interesting to divine some themes from this activity and then use them to try to predict the future.
PRIME MOTIVATOR. The first theme is that big Web outfits are getting even bigger by pursuing growth through new services and categories. Two of the three largest Internet companies in the world (by market capitalization), InterActiveCorp and Yahoo, have been aggressively consolidating their primary respective segments, travel and search services. They've accounted for nearly half of the above-mentioned transactions. Both companies have capitalized on their recent revenue, profit, and stock-price increases to further their market leadership.
Yahoo has been aiming to bolster its search technology and services to broaden its offerings. InterActiveCorp is in the process of simplifying its business structure by acquiring its two publicly traded subsidiaries: Hotels.com and Expedia. InterActiveCorp is also pursuing the rapidly growing online financial-services and real estate market, through LendingTree.
Not surprisingly, the growth that InterActiveCorp's and Yahoo's targets expect exceed those of their consolidators. Growth is a prime motivator for these companies, particularly as other segments of their businesses mature.
AVOIDING BIG TROUBLE. The deals also underscore how competition looms large. In Standard & Poor's view, Overture's purchases of both the Web-search unit of Fast and Alta Vista were more about its ability to compete with Google than anything else. This rival won one-time Overture customers such as AOL (AOL ) and EarthLink (ELNK ) over the past year or so. And in S&P's opinion, Overture needed to broaden and deepen its offerings, particularly in traditional search services, to stem further losses.
Despite its size and success, Yahoo also is also concerned about Google, as well as Microsoft's MSN online service. Overture provides outsourced, sponsored search to Yahoo, accounting for healthy growth for both companies. If Google or even Microsoft (MSFT, another major Overture customer) had acquired Overture, we think Yahoo would have been in big trouble.
RealNetworks' acquisition of Listen.com and Roxio's purchase of Pressplay were largely motivated by competitive pressures, in S&P's opinion. For months, interest was building in Apple Computer's (AAPL ) anticipated foray into online music services. In April, 2003, Apple's iTunes Music Store was launched, and it has been wildly successful. In November, 2002, Roxio acquired the assets of Napster.
Our view is that RealNetworks is hoping to capture and keep customers before the launch of iTunes' Windows offering later this year and the new Napster (with Pressplay's technology and music-industry and distribution partnerships) in early 2004.
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Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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