National Post (Latest Edition)

Internet giants go shopping for niche players

Spending so far almost double all of 2004

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NEW YORK •

The giants of Internet content have a seemingly insatiable appetite for acquisitio­ns.

Flush with cash, establishe­d leaders like

Google Inc. (GOOG/NASDAQ)

and Yahoo Inc. ( YHOO/NASDAQ)

and aspirants like News Corp. (NWS/NYSE) are out shopping for niche services. They’ve already snapped up companies that help people share photos and make phone calls via the Internet. Spending is far outpacing that of previous years, and experts expect more.

Indeed, Microsoft Corp.

says it expects to step up its dealmaking, Time Warner Inc. ( TWX/NYSE) could too under pressure to make more of its America Online business, and News Corp. Chairman Rupert Murdoch has vowed to spend heavily to build an Internet portal. They’re all banking on online advertisin­g as a key source of future profits.

Spending on Internet-related acquisitio­ns so far this year is almost double the total for all of 2004. New York research firm The 451 Group says buyers inked 178 deals worth US$26.5-billion through Sept. 16, compared with 173 deals worth US$10.1-billion in 2004. The 171 deals of 2003 were worth just US$4.8-billion.

“ The survivors, the people who’ve figured out their business plans, are going out and making acquisitio­ns and consolidat­ing their businesses,” says Morton Pierce, a mergers and acquisitio­ns lawyer at Dewey Ballantine. “It’s part of a natural cycle” of a maturing industry.

Veteran technology venture capitalist Geoff Yang of Redpoint Ventures says Yahoo, Google and Microsoft’s MSN have sealed up top spots, but that contenders like Time Warner’s America Online, News Corp. and IAC/Interactiv­eCorp (IACI/NASDAQ) are jockeying for perhaps two more. Google and Yahoo — and MSN and AOL to a lesser extent — have mostly focused on small deals to flesh out offerings and complement aggressive internal developmen­t programs. Meanwhile, News Corp. and IAC have targeted larger properties that can provide quick market share.

This increased M&A has also partly been driven by media companies, such as newspapers, looking to the faster growth of online advertisin­g to offset more sluggish newspaper ad revenue. Mostly they’ve bought niche Web properties that mirror their existing businesses, rather than try to beat paths into the pantheon of Internet giants, although News Corp. is the notable exception. In contrast, Internet companies have bought into niches to broaden their offerings.

“ A number of establishe­d firms are seeing that the time is right to develop more full-service products by acquiring a number of players who are leaders of small well-defined niches,” says Ken Marlin, founder and managing partner of boutique technology investment bank Marlin & Associates.

For instance, Yahoo and Google both snapped up digitalpho­to companies. In March, Yahoo bought Canada’s Ludicorp Research & Developmen­t Ltd., owner of photo-sharing Web site Flickr, and Google acquired photo-organizing software maker Picassa Inc. in July 2004. In the Internet-telephony arena, Microsoft bought Teleo Inc. and Yahoo bought Dialpad Communicat­ions Inc. And in mobile services, AOL bought Wildseed Ltd. and Google bought Dodgeball.com.

Industry watchers expect more of the same kinds of deals. “ Any place where digital content is aggregated, that is where you’re going to see the next M&A,” says Andrew Schroepfer of The 451 Group.

Mr. Schroepfer thinks digitalvid­eo companies, such as Internet TV startup Akimbo Systems, and local-search and content providers such Interchang­e Corp. and Craigslist.org, will attract suitors. Paul Inouye, an investment banker at Piper Jaffray, says wireless content will remain a hot area, particular­ly in gadgetinte­rnational markets.

“People are trying to build scale because they want to stay relevant, they want to have reach and they want traffic to amortize all the costs on,” Mr. Yang says. “ As long as you see these stock values high, and you still see some pretty good growth, you’ll continue to see acquisitio­ns.”

Meanwhile, target companies are stronger, able to command better prices and more willing to sell, says Marlin. He expects the M&A activity to continue in earnest for three or four years.

Yahoo says loftier valuations means it often chooses internal developmen­t over acquisitio­ns, though it will sometimes try to get into a market faster by buying technologi­es it can build upon.

It’s more cost effective to go this route because Yahoo’s leadership position means it can easily penetrate niche markets, says Toby R. Coppel, Yahoo senior vice president of corporate developmen­t.

Internatio­nal markets, however, are different. The race for global market share prompted Yahoo to pony up US$1-billion for a 40% stake in Chinese firm Alibaba.com Corp. last month. It handed over its local operations to the firm. A week later, Google filed to raise about US$4-billion through secondary offering of stock and said some of the proceeds would be used to fund acquisitio­ns, sparking speculatio­n it too would make a big buy in Asia.

The size, growth pace and profitabil­ity of the Internet industry will continue to attract participan­ts and spur consolidat­ion and innovation, observers say. Dow Jones

 ?? MICHAEL NAGLE / BLOOMBERG NEWS ?? News Corp. is committed to buying an Internet Portal, says chairman Rupert Murdoch.
MICHAEL NAGLE / BLOOMBERG NEWS News Corp. is committed to buying an Internet Portal, says chairman Rupert Murdoch.

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