March 29, 2005

The past week was busy in Internet acquisitions, led by IAC/InterActiveCorp's agreement to pay $1.85 billion for Ask Jeeves.

Also last week, Yahoo disclosed plans to buy Flickr, a Web site that has won considerable buzz among the digerati as a place to store and share digital photography. Shortly afterward, Hewlett- Packard unveiled a deal to buy a similar company, Snapfish.

The number of acquisitions doesn't compare with the fast-paced wheeling and dealing of the late 1990s, when it seemed as if there was an Internet merger every day. Still, the current activity reflects a significant increase from the relatively slow pace of the past few years, according to industry executives and analysts.

"You have a lot of companies with a lot of cash," said Scott Kessler, an analyst for Standard & Poor's. "At the same time, there's a lot of innovation taking place. You put those together -- capital and ideas -- and that leads to mergers."

Internet industry giants such as Yahoo and Google are blossoming, thanks to a strong online advertising market. At the same time, traditional media companies are looking to expand their Internet presence to get a bigger share of the advertising profits.

Barry Diller, InterActiveCorp's chief executive officer, hopes that the acquisition of Oakland's Ask Jeeves will help direct users to his online empire. His company, based in New York, includes Expedia, Ticketmaster and Match.com.

"From Ask Jeeves' perspective, it really does make sense," said Sasa Zorovic, an analyst for Oppenheimer & Co. "They were increasingly playing in a world of giants," including Yahoo, Google and Microsoft's MSN.

Content Web sites, spurned after the dot-com collapse, are especially hot commodities. Their primary buyers are newspaper companies, whose readership is gradually shifting from paper to the Internet.

The New York Times Co. has bought About.com, a Web portal for finding information owned by Primedia, for $410 million. The Washington Post Co. bought Slate, the online magazine, for an undisclosed amount. Dow Jones & Co., which owns the Wall Street Journal, bought MarketWatch, the San Francisco financial news site, for $528 million in January.

Anthea Stratigos, co-founder and chief executive of Outsell Inc., a publishing industry advisory firm, said that such deals allow companies to expand quickly and avoid having to reinvent the wheel. For a company like the New York Times, building a major Internet portal from scratch is a ludicrous waste of time, she said.

"To be in print and online is essential," Stratigos said. "People still have very diversified reading habits."

When not buying Web sites, some media firms are investing. This week, Gannett, Tribune Co. and San Jose's Knight Ridder said they will acquire 75 percent of Palo Alto's Topix.net, a Web site that links users to more than 10,000 news sources.

Domestically, the e-commerce arena has been relatively quiet. EBay has been one of the few buyers during the past six months.

The San Jose online marketplace scooped up apartment listing service Rent. com for $415 million. It also bought 25 percent of Craigslist, the San Francisco online classified site.

Bart Schachter, founder and managing partner for Blueprint Ventures, a venture capital firm in South San Francisco, said that there is room for a lot more acquisitions. Smaller companies have been largely left outside the buying spree, he said.

"There is not enough consolidation," Schachter said. "If we see 10 times or 20 times the activity, then we know the market is strong."

Of the small companies being bought, many fall under the rubric of community. Blogging and online photography are popular targets partly because they elicit repeat visitors and are compatible with customized Net advertising.

Acquisitions in the Internet industry declined after the dot-com bubble burst. Some companies used the opportunity to bottom fish for bargains.

But most focused on fixing their own finances. The road back has been gradual and included several major acquisitions that preceded the current wave, including Yahoo's purchase of search engine advertising firm Overture in 2003.

Brian McAndrews, CEO for aQuantive, an online advertising firm, said that recent acquisitions are being driven by strength rather than desperation. Many of the companies being bought are profitable. Those that aren't making money are small enough that they will not have a large negative financial impact on the buyer, he said.

Still, Internet acquisitions have had a checkered past. High-profile failures include the mergers of America Online and Time Warner, Excite and AtHome, and Lycos and Terra Networks.

"The deals today are more rational," McAndrews said.

Source: SF Gate

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