Internet M&A Activity Will Continue in 2000, but Nature of the Deal Will Change

SAN FRANCISCO -- The pace of Internet mergers and acquisitions has been so intense that rational people have to wonder: When will the madness stop?

Internet executives, M&A lawyers and investment bankers say the consolidation could last at least another year, assuming the broader stock market holds up. But the nature of the deals will change, becoming smaller but more frequent, especially in such industries as business-to-business e-commerce, online marketing and financial services.

"I don't see any reason why consolidation should fall off," says Doug Cogan, partner and M&A co-chair of San Francisco law firm Fenwick & West. "It just doesn't make sense for there to be thousands and thousands of companies."

The market seems to agree. So far in 1999, more than 1,200 mergers and acquisitions worth approximately $76 billion have occurred in the Internet industry, according to Thomson Financial Securities Data. That compares to 458 deals worth $24 billion in 1998. Driving that merger surge has been a need among companies to boost their market share, or an effort to obtain a valuable technology or product that would take too much time and money to build on their own.

Some of the biggest mergers this year had several key factors behind them. High-speed Internet service provider @Home merged with portal Excite to increase its reach and enhance its ability to produce content for its broadband service. Internet directory and portal Yahoo! (YHOO - Cramer's Take - Stockpickr) acquired Broadcast.com to acquire viewers and streaming-media infrastructure.

"In 1999 I think you saw the major consolidation occur," says Mark Stevens, Excite@Home's (ATHM - Cramer's Take - Stockpickr) head of business development. "I think now it's pretty clear who the leading companies are."

Top 10 Net Mergers
Date Announced	Acquirer	Target	Value
May 19	Healtheon	WebMD	$7.9B
Jan. 19	@Home	Excite	5.9B
April 1	Yahoo!	Broadcast.com	4.7B
Jan. 27	Yahoo!	Geocities	4.5B
April 6	TCI Music	Liberty Media Net and TV assets	4.3B
June 29	CMGI	AltaVista	2.5B
July 12	Walt Disney	Infoseek	1.6B
Sept. 23	MindSpring	Earthlink	1.6B
Nov. 22	Prodigy	SBC's Internet Access Business	1.6B
May 10	NBC	Xoom.com	1.5B
Source: Thomson Financial Securities Data, Market Guide.

But because most of the large, independently operated Web sites have already been acquired, Stevens says that that will change the complexion of Net M&A activity in the year 2000.

"There isn't the Geocities available that can make a material difference to your reach in the marketplace," says Stevens. "So the larger companies will go down to the next 100 sites."

What the New Year Will Bring

If 1999 was the Internet's year of large-scale consolidation with the industry's biggest players jumping in bed with one another, 2000 is more likely to witness smaller deals on a much wider scale. "What you have now is a much broader number of acquirers so the number of transactions has picked up," says Brian Meyer, vice president and head of Internet M&A at merchant bank Thomas Weisel Partners.

A particularly hot area, says Meyer, is B2B e-commerce as companies scramble for market share and new products and services. In the last couple months, VerticalNet (VERT - Cramer's Take - Stockpickr) acquired NECX for $115 million, Ariba (ARBA - Cramer's Take - Stockpickr) purchased TradingDynamics for $400 million and Commerce One (CMRC - Cramer's Take - Stockpickr) bought CommerceBid.com for $200 million.

Meyer says another hot area is e-marketing, or companies focused on creating ways to advertise or market online. Since this summer, Internet holding company CMGI (CMGI - Cramer's Take - Stockpickr) has scooped up seven firms in this area, including Flycast (FCST - Cramer's Take - Stockpickr) and AdForce (ADFC - Cramer's Take - Stockpickr).

Other areas ripe for M&A to flourish: financial services, driven by the continued growth in online investing; online retailing, driven by the weakness and saturation of the market ("You don't need eight companies selling pet products," says Meyer); content companies, which are looking to increase their distribution beyond the desktop computer into handheld devices; and Internet companies outside the U.S.

"There are no strong international Net companies," says Meyer. "The U.S. guys will be expanding abroad through acquisitions."

Of course, all of this activity hinges on the health of the stock market. As long as the stock market continues to reward Internet companies with high valuations, going public will continue to be the most compelling exit strategy for most dot-coms.

"My gut tells me that it just can't continue forever," warns Fenwick's Cogan. "When the market slows down, then the exit strategy for a hot private company will be acquisition."

Perhaps the hardest factor to comprehend is the imperative to cut deals and to cut 'em fast. This creates a vicious cycle that fuels the deal-making machinery.

"If you're not doing deals then something's wrong with you," says Cogan. "And in order to keep your price high you've got to do deals."