Diverse Group of Buyers bodes well for Web 2.0 exits

March 1, 2006
Venture Capital Journal

By: Constance Loizos, Senior Editor

Face it. Your portfolio companies need homes, and neither the Nasdaq nor the New York Stock Exchange is going to usher the majority of them through its front door. Unless you're planning to trot them off to a foreign exchange, you have just one option: to sell. But the longer you wait to sell-especially if your startup falls anywhere underneath the broad Web 2.0 umbrella-the grimmer your chances of successfully exiting at all.

"For some sectors like gaming that appeal to a number of acquirers from old media and new media companies to the phone carriers, you can get from five to seven suitors involved in a bidding war," says Christopher Greer, head of M&A at Rutberg & Co., a San Francisco investment bank. Generally, though, "Companies shouldn't even try to go all the way to the end," he says. "The monsters, the elephants, they don't like to pay for a ton of customers or a ton of revenue. They want to see proof of concept and between $20 million to $30 million in revenue."

The question, then, is who's buying? The answer is: Many more companies than the usual suspects. AOL, Google, Microsoft and Yahoo are too often viewed as the only game in town by entrepreneurs and their venture backers. But contrary to popular belief, many publicly traded companies are combing through available merchandise in an effort to fill holes in their product lineups. Indeed, according to data culled by BA Venture Partners, 379 Internet startups were purchased last year. The acquirers ranged from Web analytics outfits to online matchmakers to wireless Internet providers, while the buyers ranged from Dun & Bradstreet to Verisign to the Republic of Seychelles (see chart, page 10).

What's in store for this year? "We expect the M&A market for top Internet properties to remain very active, but we think buyers will be more disciplined this year," says Steven Fletcher, managing director at Savvian, a San Francisco investment bank. "We think that means that deals are starting to require greater rationale and more rigorous acquisition valuation analyses. I don't think we're going to see the kinds of land grabs that we did last year."

Some of the suitors most worth watching include the following:

Experian

Owned by the London-based holding company GUS plc, Experian is familiar to most consumers as a credit reporting company, but it does much more with every year that passes. Though it has long supplied information services relating to customer relationship management, e-commerce and marketing to tens of thousands of clients worldwide, the company is also increasingly making money from the credit information that it manages for more than 215 million U.S. residents. For example, it provides address information for more than 20 billion promotional mail pieces to more than 100 million homes annually.

Experian has also made a sizable, if comparatively quiet, splash as an Internet company. It made its first purchase four years ago, shelling out $130 million for ConsumerInfo.com in 2002. (Experian bought the company from Homestore.com and quickly began selling credit reports to consumers.)

Experian formally created its Interactive Division last year with its $330 million purchase of LowerMyBills, an online company that produces mortgage and other loan applications. Prior to its sale to Experian, LowerMyBills had raised just $13 million over two rounds from eCompanies Venture Group, Split Rock Partners, St. Paul Venture Capital and Evercore Ventures.

Experian's other Internet-related purchases include the $485 million it paid for comparison shopping site PriceGrabber.com, which launched with $1.5 million in seed funding, and two purchases of non-venture-backed companies for undisclosed amounts: ClassesUSA, a database of online education programs, and Affiliate Fuel, a pay-for-performance ad network.

That's a pretty telling shopping spree. All are basically lead referral businesses designed to fit into Experian's global strategy of providing new products, new data and new entry into vertical or regional markets, but also to make Experian into one of the most serious Internet players in the country.

In short, Experian knows how to make money online and off, and it is using that money to become a bigger competitor with the likes of everyone from Google to the ad network ValueClick. Indeed, according to the company, the acquisitions of LowerMyBills and PriceGrabber.com have already made Experian the 10th largest Internet company in the United States based on revenue. Judging by its appetite for success in recent years, Experian plans to climb even higher than that.

IAC/Interactive Corp.

Formerly USA Interactive, IAC/Interactive Corp. is a mushrooming Internet conglomerate. Before last year, it already owned Lendingtree.com, Home Shopping Network (HSN), Ticketmaster and Citysearch. (It also owned travel subsidiary Expedia.com, which it spun off to shareholders in August 2005.) Though IAC moved away from its media roots in 2002-it sold its entertainment assets to Universal Studios-it swung back in the opposite direction last year, agreeing in March to buy search engine AskJeeves in a stock swap deal worth about $1.85 billion.

Another sign of its future direction? In January, it hired Michael Jackson, formerly the chair of Universal Television Group and CEO of London-based Channel Four. Jackson will head up development, acquisition and programming distribution to help grow IAC's multiplatform content business.

Jackson, who created "Trading Spaces" among other shows for British television, has said that he wants to create or buy programs that link IAC's shopping assets, like HSN and Match.com.

Worried that would-be sellers will jack up prices, IAC head Barry Diller said in February that his company is unlikely to make more big acquisitions in the near future. He says the company's plate is already full and Internet companies are too steeply priced. In fact, IAC has made just one purchase since the AskJeeves deal. In January, it paid an undisclosed amount for shoe e-tailer Shoebuy.com, ostensibly to expand its inventory into other product categories where cross-promotional opportunities might flourish.

But VCs concerned that IAC has ended its shopping spree needn't lose faith. In an interview with the Financial Times, Diller said last month that "if something comes along at a rational price, we'll look at it." Meanwhile, Jackson recently told BusinessWeek that "we'd like to look for a site like AtomFilms or iFilms," which produce short films.

Thomson Corp.

Thomson (publisher of VCJ) is essentially an Internet company, specializing in high-end analytics and information in the areas of legal and regulatory, scientific and health care, learning, and financial data. In fact, VCJ is one of the Toronto-based company's few traditional media assets. It shed most of its 130 daily and non-daily newspapers several years ago, as well as its 20% stake in the Canadian media giant Bell Globemedia, in favor of niche electronic products.

Not surprisingly for a company that has made more than 200 acquisitions in the last four to five years, Thomson continues to plan to aggressively grow its businesses, says Richard Benson-Armer, Thomson's corporate chief strategy officer. Last year alone, the company spent $289 million on 35 acquisitions, only two of which were purchases of $25 million or more. Among the companies it snapped up was Quantitative Analytics, a startup focused on financial software and data applications that had raised $50 million from TA Associates. (Financial terms of the deal weren't disclosed.)

Thomson is expected to keep up its aggressive pace this year. "Anyone selling anything that's remotely data driven, especially around financial technology, should talk to Thomson," says Paul Kedrosky, a venture fellow with Ventures West Management in Vancouver, B.C. "They've explicitly stated that they want to continue to make six to 12 acquisitions a year, and they're a deep-pocketed acquirer."

How deep? According to Benson-Armer, Thomson could spend anywhere between $300 million to $500 million this year on acquisitions. "We view technology as an enabler, and as markets change-especially because some of our core markets are growing at different rates-we aren't always atop them. If we miss something, or a startup develops something that we haven't already thought of, we're happy to fill a gap through an acquisition. We also see [M&A] as a way to accelerate our business models."

So what's Thomson most interested in? Benson-Armer notes that the company doesn't want to be a strict content provider. It's interested in "workflow solutions, high-end analytics, and other things that are invaluable to professionals who are information-dependent," he says. Thomson is also "attracted by geography. Asia, for example, is a fast growing market for us, so we're always looking for companies that will accelerate our growth there." An example of where Thomson is expressly looking to the VC community for help right now is around English language teaching. "We're just starting to see some innovative solutions, but we know that there are multiple answers out there, and we're interested in talking to VCs about what they have," Benson-Armer says.

Electronic Arts

The No. 1 video game publisher in the U.S., with more than 100 popular titles, including "Madden NFL," Electronic Arts not only develops games for its own brands, but it also distributes titles for third parties and publishes games for movie franchises like Harry Potter and James Bond. "In terms of entertainment revenues, the gaming industry far surpasses what Hollywood is bringing in," says Greer of Rutberg. The advertising market alone for the gaming industry is projected to post revenue of $562.5 million by 2009, up from just $34 million in 2004, according to Boston-based research firm Yankee Group.

EA is growing more ubiquitous through an agreement with mobile entertainment company Amp'd Mobile. EA will bring 15 mobile games from its most popular franchises to Amp'd Mobile's 3G handsets in the first half of this year. That agreement, suggests Greer, is just the start. Pointing to EA's $680 million acquisition of Jamdat Mobile (which is expected to be finalized in Q1), he notes that the two plan to publish more than 50 cell phone games in the next 12 months. "This isn't like years ago, when folks sat back and said, How big is the Internet really going to be?'" says Greer. "I think everyone understands how big the mobile phone will be, and startups [hoping to be acquired] can't think only about new media companies like Yahoo or Google, or even old-line studio companies. They should definitely be mindful of companies on the gaming side like EA."

CNET Networks

It's baaack. Last year CNET paid $11.1 million in cash and stock for 90% of PCHome, a Shanghai-based personal technology website. It paid another $11.5 million in total for HeyPix, MetaCritic and TVTome. None was venture backed. However, the moves-along with CNET's February acquisition of Consumating, a dating site for the young and hip, run single-handedly by its two founders-underscore how the booming online ad market has revived CNET's fortunes and rekindled its media ambitions. So does CNET's recent decision to drop one of its older print properties, Computer Shopper magazine.

"I'd say they're one to watch," says BA Ventures Managing Director Sharon Wienbar. "I understand that they've looked at a bunch of deals."

CNET has, of course, long provided news and product information through Cnet.com, News.com and ZDNet, as well as offering information about digital music at MP3.com and allowing users to download shareware through Download.com. Analysts say it wants to grow its array of Web properties by entering new categories, most likely through acquisitions. A recent report by CIBC World Markets, for example, states that CNET is expected to "grow in terms of advertiser mix" and "revenue should grow at a robust rate," adding that by closing Computer Shopper magazine "allows it to focus more on its core interactive businesses and frees up capital that can be reinvested ... for better overall returns."

Interestingly, while Yahoo and Google continue trying to simplify the look of their text-based paid-search links, CNET is delivering rich, graphic content streams across its many sites. It's a big bet on the continued proliferation of high-speed Internet connections, but it seems like a safe one.

News Corp.

Where to start? Last year, News Corp. paid $650 million in cash for online video game company IGN Entertainment, and another $60 million for venture-backed Scout Media and $580 million for Intermix Media, which runs the wildly popular social networking site MySpace.com. Scout Media had raised $12 million in venture financing, largely from former NFL quarterback Bernie Kosar and his brother Brian. IGN Entertainment had raised roughly $35 million from the private equity firm Great Hill Partners, which later sold parts of its stake to Liberty Mutual and Banc of America Capital Investors. Meanwhile, publicly traded Intermix, along with Redpoint Ventures, had funded MySpace with $5 million.

Though it remains unclear how News Corp. intends to leverage its multiple new platforms, its Fox Interactive Media division has "very ambitious plans," says Greer, including its recent agreement with Movielink, a joint venture of five Hollywood studios to offer movies over the Internet. "People forget about [News Corp.], but they're extremely acquisitive," adds Kedrosky. "They're usually involved in the action or bidding of any interesting property, though they typically have to horn their way in. People still have a bias [against traditional media companies]. Typically, investment bankers leak [a potential deal] and Fox says, Hey, what about us?'"

In an early February earnings call, News Corp. CEO Rupert Murdoch said that in 2006, News Corp. "expects to generate $350 million in revenue from our Internet properties and I'll be disappointed if the Internet segment isn't among our biggest growth engines over the next few years."

Ahead

The encouraging news is that if you need to sell, you can probably find interested buyers. The not-so-good news is that you may need to be creative about finding them. Google and Yahoo can't buy everything. Besides, the overall market isn't nearly as sexy as it was six months ago. Says Savvian's Fletcher: "Will [Web 2.0 companies] be good investments? Only time will tell. Some will be able to go public if they meet the criteria. Others will sell to buyers. Still, it's already clear that 2006 is going to be more like 1997 than 1999."

Just keep in mind that for the overall VC industry, that's actually a very good thing.