M&A ACTIVITY IN THE INTERNET SECTOR IN H1 2008...read more>> Public Equity Performance...read more>> Private Equity Buyers Still Show Interest...read more>> Microsoft & Yahoo!: The Mega-Deal That Wasn't...read more>> WHAT'S AHEAD Moving Toward A Distributed Web...read more>> Google Apps, iPhone, And The Enterprise: Consumer-Business Worlds Converge...read more>> Social Networking Sites Increase Global Focus...read more>> REFERENCES...read more>>
In H1 2008, Updata tracked 87 Internet sector deals, down 25% since H2 2007 and 19% since H1 2007. Total announced enterprise value (EV) of the targets acquired is also down by 54% to about $10.7 billion since H2 2007 and 48% since H1 2007. Although overall median multiples of EV to trailing 12 months (TTM) revenue are down 20% since H1 2007 to 3.9x, they remain relatively high compared with other tech sectors and are actually up 13% from H2 2007, suggesting a possible valuation bottom (see Figure 1).
Despite the decline in M&A activity, there were notable big ticket deals in the sector (see Figure 2). The largest Internet deal tracked by Updata was Hellman & Friedman's buyout of public visual media company Getty Images for just north of $2 billion which was completed in July. Electronic Arts, reacting to the December 2007 acquisition of Activision by French entertainment giant Vivendi for $18.9 billion, made an offer in February for Take-Two Interactive Software, maker of the Grand Theft Auto series, for almost $2 billion. Another headline deal was the acquisition of CNET Networks by CBS for $1.7 billion which was completed in June.
Figure 1 M&A Analysis For Internet Deals Tracked By Updata
Figure 2 Internet Deals Greater Than $500 Million In Enterprise Value
Public Equity Performance
During the six-month period ended June 30, 2008, Updata's index of public Internet companies significantly underperformed the NASDAQ and other tech sectors, declining 19.4% versus 13.6% for the NASDAQ (see Figure 3). Weak price performance largely reflects concerns over growth prospects in a slowing economy. For example, Google's stock hit its lowest point year-to-date in March after comScore reported that Google's domestic paid clicks were down 9% from Q4 2007. Google's stock price then rose 30% from that point a month later after an upbeat earnings call.1 Also affecting prices were company-specific developments such as the withdrawal of Microsoft's bid for Yahoo! in May. Within Internet, performance varied materially by sub-sector (see Figure 4).
Figure 3 Six-Month Relative Stock Price Performance By Sector Versus NASDAQ
Figure 4 Six-Month Relative Stock Price Performance - Internet Sub-sectors
Private Equity Buyers Still Show Interest
Although the U.S.-led credit crunch dramatically reduced overall private equity buyout activity, Internet sector buyouts have held up, with several notable transactions (see Figure 5). In the first half of 2008, Updata tracked seven acquisitions of Internet companies by financial buyers totaling almost $2.8 billion in announced enterprise value -- $2 billion of this represents the Getty buyout, the largest Internet deal in H1 2008, which helped push announced values from private equity Internet deals up 23% from H1 2007.
Figure 5 Private Equity Internet Deals
Microsoft & Yahoo!: The Mega-Deal That Wasn't
Microsoft's attempted acquisition of Yahoo! launched in early February was the most headline-grabbing Internet deal of H1 2008. Microsoft sought Yahoo! to compete more effectively with web search and advertising giant Google. The deal was framed as a titanic struggle for Microsoft to gain the traffic, destinations, and technology it did not quite have to become a major contender online and offset its aging Office franchise. Traffic and engagement drive monetization, and packaged applications are moving off the desktop and into the cloud. Consequently, Microsoft still desperately needs scale online. For this reason, though the bid was rebuffed by Yahoo!'s board, the rationale remains compelling; the deal could heat up again in coming quarters. In the meantime, Microsoft has moved on to smaller players in the Internet space picking up Danger, Navic Networks, Rapt, and Farecast in H1 2008. Below is a figure containing selected deals in the search and advertising space which were announced in H1 2008 (see Figure 6).
Figure 6 Search And Advertising Deals
WHAT'S AHEAD
Moving Toward A Distributed Web
Ever-expanding online content and services "in the cloud," together with an array of tools that make it easier for people and start-ups to create their own sites, have ushered in the distributed web era. In the past few years there has been an explosion of content-rich destinations across the web. Whereas not so long ago users could only watch their favorite shows on their televisions, now they can go to the networks' sites, YouTube, Hulu, or any number of illegal download sites to get those shows. Indeed, users now seem to have almost limitless choices when it comes to finding content. What's more, content itself has grown exponentially -- user-generated content, in addition to treasure troves of shows, music, and (current and archived) news articles has added to the stockpile. Sites also run services and store data of value to the enterprise market and professionals.
Advertisers are challenged by the distributed web to figure out where the best place to reach their target audience is now that users are finding their content in a myriad of places. Content owners have to balance widespread syndication with ownership and control. And users are overwhelmed by the sheer volume of content and the new applications the web has to offer.
The distributed web is forcing everyone to adapt. Content owners like the NBA or movie studios offer widgets to enable fans to post snippets of their favorite shows on their Facebook pages. Advertisers are using targeting technologies and ad networks to tailor messages to widely dispersed audiences. Businesses are developing applications that pull data or services from the various sites and they are integrating for internal use.
The next generation of the distributed web enables greater customization by mashing-up disaggregated inputs. This in turn drives user engagement and, of course, advertising revenues. Facebook offers an early glimpse of the power of the next generation of the distributed web. Building upon a social network with customizable pages, Facebook provides a platform for pulling apps and content, and its personalized News Feed shows users continually refreshed friend updates.
We will increasingly see the combination and reuse of content, data, and applications across the web to create value and dynamically personalize the web to each user's (or enterprise's) specific interests and needs. As the distributed web evolves, personalization is key, and sites will be valued increasingly for the accessibility and relevance of their underlying content and data. This content could be pulled and integrated with other resources to create new, personalized sites or services. One example of this is Google Earth, which is both a destination in itself and an input for other applications.
The next generation of the distributed web will drive growing investment and M&A deal activity over the next few years. Relevant deals in H1 2008 can be said to include eBay's acquisition of VUVOX and Nokia's acquisition of Plazes (see Figure 7 for a list of others). Capabilities in demand include:
Tools that help users publish, find, and share personalized content;
Technologies that simplify structuring of content and data for use web-wide;
Security technologies that reduce risks arising from shared content and applications and that help users figure out whom to trust;
Advertising solutions that improve relevance targeting and user behavior tracking.
Figure 7 Distributed Web Deals
Google Apps, iPhone, And The Enterprise: Consumer-Business Worlds Converge
Companies serving enterprises' IT needs face increasing competition from traditionally consumer-oriented web players. A notable example is Google's efforts to chip away at Microsoft's Office dominance with Google Apps, an offering that already claims enterprises such as General Electric, Procter & Gamble, and L'Oreal as customers.2 Google's acquisition of email security vendor Postini further indicates its seriousness about drawing enterprise customers.3
Another example of the rising challenge to enterprise tech vendors is Apple's iPhone. Last year, IT research firms Forrester Research and Gartner published reports stating that the iPhone was not enterprise-ready.4 However, the latest version of the iPhone seems to have addressed issues brought up in those reports regarding iPhone's security vulnerabilities and lack of support for third-party applications. Indeed, as the iPhone becomes more popular with consumers and Apple ramps up the device's enterprise capabilities, corporate IT departments will be pressured to allow integration.
Consumer-driven products and online services tools still face resistance from corporate IT departments that distrust consumer vendors or remain concerned with security risks associated with storing critical business and client data "in the cloud." But the writing is on the wall as more consumer Internet players go after the lucrative business market.
The phenomenon of traditionally consumer-oriented companies developing offerings for the enterprise is expected to drive investment and M&A as enterprises seek tools to bridge the gap, and as enterprise IT vendors are forced to adapt.
Social Networking Sites Increase Global Focus
According to comScore, social network popularity continues to rise quickly - unique visitors to social networking sites grew 25% worldwide since June 2007.5 Much of that growth is attributable to increased penetration outside North America. Unique visitors to social networking sites grew 33% in Latin America, 35% in Europe, and 66% in the Middle East and Africa - compared to a paltry 9% in North America. Facebook particularly has experienced tremendous worldwide growth: unique visitors grew 303% in Europe, 403% in the Middle East and Africa, 458% in Asia Pacific, and an astounding 1055% in Latin America.
Globalization will drive new dynamics into the look and feel of social sites as they cater to the cultural differences of their increasingly vast and diverse audience. New advertising strategies and tools will also emerge. eMarketer projects that business-to-business online social network ad spending will reach $40 million in 2008 which is up from $15 million in 2007. They project spending to reach $210 million by 2012.6 Social networking and globalization will continue to be potent drivers of investment and M&A in coming quarters, just as they have been in the first half of 2008 (see Figure 8).
