The internet market is consolidating rapidly, with nearly double the mergers and acquisitions (M&A) activity in the US market in January as took place in the whole of 1998. And analysts expect the takeover trend to spread to Europe.
According to a study by internet consulting firm New Media Resources, 11 transactions took place at a value of more than $11.5 billion in January - close to double the $6 billion spent in 1998.
The study showed there were 45 Web mergers and acquisitions totalling $12.9 billion in the first quarter of this year, compared with $250 million in the first quarter of 1998.
Tim Miller, president at New Media Resources, said: 'As long as the currency of internet stocks are fully valued, these deals will continue.' He added that two huge acquisitions in January - the $6.7 billion acquisition of Excite by @Home Corporation and the $4.6 billion acquisition of GeoCities by Yahoo - fuelled the high spending increase.
'I expect the number of acquisitions to grow in Europe. A general rule of thumb is that Europe generally lags behind the US by about 18 months, so I expect the number of acquisitions to increase within that same time period. Therefore, we should expect this increase in M&As in Europe in the first quarter of 2001 if that rule applies,' Miller stated.
He added that it would be useful to watch where venture capital money is deployed, because the rate of international venture capital spending is picking up in Europe. Nearly $50 million was spent on M&A activity in the region during the 15-month period which ended in the first quarter of 1999.
Miller said the surge in M&A activity also indicates that internet companies are increasingly voting to buy rather than build.
'The internet market is developing with such velocity that in most cases it makes more sense to buy a property, even if it means paying a premium. The time and energy involved in recruiting and organising a team to build is so great that a company is almost certain to fall behind if it takes that route,' he stated.
The report also indicated that during the past five quarters, it has been internet portal or would-be portal companies that have been using their richly valued stock to head the buying binge. Nearly two-thirds of all M&A-related expenditure in that period came from @Home, Yahoo, Microsoft, Excite and Lycos. The five companies paid a total of $11.4 billion to buy 18 Web properties.
But mainstream content sites such as Excite, Wired Digital and Netscape's Netcenter accounted for 57 per cent of the spending in the 15-month period, while community-oriented sites such as GeoCities, Tripod and Silicon Investor made up another 26 per cent.
E-commerce sites, including eToys.com and Buydirect.com, accounted for only 12 per cent of the total, while five other categories comprised the other five per cent.
But the much-hyped online retailer Amazon.com is also starting to make inroads into Europe, Miller said. 'On the same day in April last year, Amazon.com acquired Telebook GmbH and Bookpages, the UK's largest online bookstore,' he added.
Amazon.com has recently agreed to buy Alexa Internet, Exchange.com and Accept.com in three separate deals worth $645 million, and Derek Brown, a financial analyst at Volpe Brown Whelan, has suggested it will use the technology to monitor its customers as they surf the Web.
But it appears that buyers were willing to spend the biggest bucks on companies that could add different kinds of content and services to their own. The average price for such a purchase was $350 million. About 87 per cent of the total spend went on such Net line extensions, while a mere five per cent was spent on adding similar or identical content to buyers' existing sites.
'In coming years, we will see increasing numbers of smaller, specialised sites come into play as the Web, the narrowest of all narrowcast channels, begins to segment even more finely,' Miller predicted.
'Never before has there been such a great opportunity for motivated individuals to turn their passions into profit. And given that the internet is inherently virtual, there's nothing to prevent flourishing Web businesses sprouting in any location in the world.'
According to the report, California was the most popular place to go to make a purchase. Organisations spent about $16 billion - 87 per cent of the total expenditure - to buy more than 60 Californian Web-based companies, accounting for between 35 and 40 per cent of the total deals done. They spent only two per cent of their cash on international firms though, which represented only six per cent of the total deals.
'The Website market entered the early stages of consolidation in 1998 and heated up in the first quarter of 1999. Buyers paid - and overpaid - to grab position in the market before their competitors did and, in the case of publicly traded internet companies, to buy while their securities were amply valued,' he said.
Miller predicted that, after firms in the consumer and general interest markets are gobbled up, a flurry of deals is likely to take place in highly specialised industry sectors that appeal to small consumer and business niches.
VENTURING INTO CYBERSPACE
Pricewaterhouse Coopers (PWC) has conducted a survey that indicated venture capital (VC) investments in the first quarter of 1999 exceeded all previous levels, growing 41 per cent over the same quarter last year to $4.29 billion. James Atwell, managing partner of PWC's VC practice in the Global Technology Industry Group, said: 'The phrase venture capital investing has become synonymous with technology investing. Technology companies alone received more funding in the first quarter of 1999 than the total investments in all industries in the first quarter of 1998.'
Internet-related companies more than tripled their funding to $1.84 billion from $501 million in the first quarter of 1998. This represents a 218 per cent increase in dollar terms and a 105 per cent increase in the number of deals undertaken over a three-year period. The number of internet companies receiving funding also more than doubled to 236 from 114.
Atwell said: 'The fact that the internet is growing across all categories comes as no surprise. The shocking factor is the pace at which it grows.
The internet has grown at a faster rate than any sector we have ever tracked in the survey.'
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