Net Consolidation Speeds Up, Based on Its Own Curious Logic

What's behind this? Seymour says five forces are at work here.
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Consolidation in Web stocks has been coming thick and fast for the past two or three quarters and, during this "Christmas quarter," has hit a new high. I mark the beginning of the consolidation mania to

America Online's

(AOL)

buyout of

Netscape

in November 1998 for $10 billion, and I think it's fair to say the trend was affirmed two months later by

@Home's

$7 billion de facto acquisition of

Excite

. (In the latter case, the deal was spun as a merger, supposedly affirmed by the new venture's new name,

Excite@Home

(ATHM) - Get Report

, but it was clear both before and after the deal that @Home was the dominant force.)

Tech Savvy: Join the discussion on

TSC

message boards.

Even this year's already-fast pace has clearly picked up steam since early October. Last week alone, we saw AOL's grab of

Tegix

,

Sybase's

(SYBS)

buyout of

Home Financial Network

and

Informix's

(IFMX)

purchase of

Ardent

(ARDT)

.

Amazon.com

(AMZN) - Get Report

bought all of

Back to Basics Toys

, plus a deeply discounted chunk of luxury-goods seller

Ashford.com

(ASFD)

.

Redback Networks

(RBAK)

bought

Siara Systems

for $4.5

billion

.

DoubleClick

(DCLK)

bought

Opt-in Email.com

.

CMGI

(CMGI)

bought instant-messaging player

Tribal Voice

.

EMusic.com

(EMUS)

bought

Tunes.com

.

AltaVista

bought

Raging Bull

.

eMachines

effectively bought

Free-PC

(in which I have a small, indirect holding).

Whew

! That's just one week -- and I probably missed some.

What's behind this? There are five forces at work here, I think. (Like most analysis of Street moves, this isn't a simple, clean list. There's lots of overlap.)

  • Fear: Maybe I should be polite and say "The Survival Instinct," but whatever the label, a lot of these deals are being driven by fear, pure and simple. Fear of competition. Fear of a "Web Winter" in the capital markets. Fear that only one or two winners will survive in each market segment ... and that your company won't make that short list. (Fear can be an effective motivator, but it is rarely a source of wisdom.)
  • Inflated Share Prices: It's now or never, many Net execs believe. With share prices pushing into the stratosphere, the market will judge them a failure, they fear, if they don't use those fat paper prices to gather in as many pieces of the puzzle as they can. (Unfortunately, of course, that often results in illogical and sometimes downright stupid acquisitions.)
  • Mass, Critical and Otherwise: You gotta get big, fast. Period. It's among the most basic Web mantras. And it's probably true. Look at the most-visited sites this manic shopping season: eBay (EBAY) - Get Report, Amazon and so on. Even in peacetime, the biggest sites get bigger, while noble but smaller e-businesses get -- well, poorer. (Growth for growth's sake -- think "profitless growth" -- doesn't work many places, but time may prove that on the Web it does. Maybe.)
  • The Walking Wounded: This is a great time for powerful Web sites to pick up others that either failed or are still small enough to need a rich, powerful partner. (How else do you think Amazon was able to buy a 16.6% slice of Ashford.com for just $10 million -- a tenth of the price ordinary investors would pay? Connection$ count.)
  • Evolution: As strange as all this sounds, it has precursors in the evolution of other markets, from automobiles to cable systems. The differences here are velocity and digits: The explosion of the Net means the megadeals we're seeing have come together much faster, compressing decades into months, and are priced far higher -- "adding commas," in the words of a friend on Wall Street -- far faster than we've ever before seen. (Evolution is not always a pretty thing, and it's rarely measured and linear. Darwin, etc.)

Will it continue? You bet. The Net is rich right now with hidden arbitrage plays. Problem is, most of the best acquisitions are companies about to undergo explosive growth, with something special in their business model or focus -- but still private.

Just as with

Cisco's

(CSCO) - Get Report

stunning buyout in late August of tiny

Cerent

-- a company with just $10 million in sales, but a bright future with plans for what looked to be a huge IPO -- individual investors are increasingly being cut out of these arbitrage opportunities. Unless you're an angel investor or a first-round venture-capital firm, you aren't going to have stakes in these prime targets.

I heard a TV talking head say the other day that "these high-dollar Net acquisitions are about to burn out." I don't know what he'd been smoking, but in the reality I occupy, that's far from true.

Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Seymour had a small, indirect interest in Free-PC, although holdings can change at any time. Seymour does not write about companies that are current or recent consulting clients of Seymour Group. While Seymour cannot provide investment advice or recommendations, he invites your feedback at

jseymour@thestreet.com.