Internet Mergers: Who's Next?


By Steve Rosenbush Dealmaking has returned to the Internet sector with an intensity not seen in years. Web companies have shaken off the stigma associated with the Nasdaq crash of 2000 and are attracting big buyers from both the on- and offline worlds.

In the past year, News Corp. (NWS) has announced plans to buy Intermix (MIX), parent of social-networking site Myspace.com, for $580 million in cash. New York Times Co. (NYT) purchased search site About.com for $410 million in cash. And Dow Jones (DJ) bought news site Marketwatch.com for $519 million in cash.

But the acquisitions may have only just begun. One media executive says investment bankers are making the rounds with a list of potential targets that includes a dozen or more Internet companies.

BIG FISH SNAPPING. One possibility: Theknot.com, (KNOT), a wedding-planning site, which is on the block and has held talks with a number of potential suitors, BusinessWeek Online has learned. The leading potential buyer is retailer Target (TGT), according to one company insider. While no one knows for sure whether they'll combine, the companies have had a business partnership since April, cooperating on a bridal registry service. Both declined comment for this story.

Such a deal would follow a recent pattern of large, traditionally bricks-and-mortar companies snatching up small and midsize Internet outfits. Of course, Web giants like Yahoo! (YHOO) and Google (GOOG), with market caps of $48 billion and $80 billion, respectively, would cost far too much to acquire -- but other, smaller candidates abound.

Theknot.com, for one, has existed since the 1990s and posts a net profit. But it's a relative bargain, with a market cap of $230 million -- a pittance compared with Target, worth nearly $50 billion.

THE PRICE IS RIGHT. "There has been a real bifurcation of value among Internet companies. The big ones are out of reach, and some of the smaller ones look cheap. That tends to drive activity," says D. Jonathan Merriman, CEO of investment bank Merriman Curhan Ford. While the bank has worked with Theknot.com in the past, Merriman says he had no knowledge of its immediate plans and declined to comment on whether it was on the block.

The hottest targets tend to have valuations well under $1 billion. Although it's known that news site CNET (CNET) is up for sale, with a valuation of $1.9 billion, it has had little luck finding a buyer. The same holds true for gaming site IGN (see BW Online, 8/22/05, "IGN Entertainment: Where the Boys Are"). The privately held company is looking to get close to $1 billion. With no takers in sight, it may head for an IPO.

But the price of many well-regarded sites is just right. With a valuation of $440 million, the women's-oriented media site ivillage.com will likely find a buyer, investment bankers say. One possible outcome: a merger with rival Lifetime Entertainment, a venture of Disney (DIS) and Hearst.

LESS STIGMA. Industry watchers consider privately held movie-listing service Fandango.com a logical partner for AOL's Moviefone.com. "But the buyers are almost never who you expect them to be," cautions Jack Flanagan, senior vice-president at Internet researcher comScore Networks. "They tend to come out of the blue, like New York Times and About.com."

The current round of M&A activity dates back all the way to October, 2003, when Time Warner's AOL (TWX) said it would buy Advertising.com for $435 million. The deal signaled that Time Warner had recovered its equilibrium after combining with AOL in a merger sometimes derided as the worst of all time.

The AOL-Advertising.com deal anticipated a huge runup in the online ad business. And a clear trend has emerged: The Web is drawing ad dollars from traditional media. Global online-ad revenue is expected to rise nearly 40% this year, to $13 billion, from $9.6 billion in 2004, according to Ken Marlin, managing partner of Marlin & Associates, an investment bank and adviser to media companies. That's more than five times the pace of growth in most traditional categories.

REGARD WITH SUSPICION. Global growth is driving Internet M&A, too. China ranks as particularly important. The IPO of China-based search company Baidu.com (BIDU) earlier in August drew attention to the sector (see BW Online, 8/22/05, "There's More Where Baidu Came From ").

Yahoo has made an investment in China's Alibaba.com. "We have held Chinese Internet companies for a long time. They are an important source of future growth," says Ryan Jacob, CEO of the Jacob Internet Fund, which has $70 million invested in Internet companies.

Jacob regards China's Sohu.com as a likely target because of its search technology. And he considers its price reasonable. From a strategic point of view, he likes instant-messaging site Tencent.com. He says an IM deal won't arouse the ire of regulators in the Middle Kingdom, who tend to regard with suspicion Western-owned news and media ventures. And IM can be used as a platform for all sorts of services that generate ad revenue.

FAR MORE BUZZ. Across the Pacific and U.S., big media companies are waking up to the fact that the Internet is evolving into a mainstream form of distribution for news and entertainment. The Live 8 fund-raising concerts generated far more buzz on AOL than they did on cable TV. Hence MTV is planning to broadcast its next award show on its Web site.

All in all, the environment is light-years away from that of the recent past, when Internet deals hinged on a hope and a prayer. The values of Net companies then were based on page views and other assorted metrics. Now the froth has been skimmed. The survivors are generating ad revenue. "Now it's about money," Merriman says.

And that's why this boom looks as if it's going to be around for a while.

Rosenbush is a senior writer for BusinessWeek Online in New York


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