Internet M&A Deal Volume and Valuations

After a record breaking 2010, Internet exits jumped 27% in 2011, to 794 M&A transactions.  On a quarterly basis, Internet deals accelerated from 1Q11 to 3Q11, then slowed in 4Q11 (Figure 57).  The number of Internet M&A transactions was nearly half the total number of on-premise software M&A deals in 2011, compared to only one third as many in 2010.

Internet TTM exit valuations rose in each quarter of 2011.  The median TTM EV/Revenue exit multiple for Internet providers in 4Q11 was 2.8x, up sharply from 1.8x in 4Q10 (Figure 58).  There were three mega deals in 2011: eBay’s acquisition of GSI Commerce ($2.1 billion EV, 1.6x TTM revenue); Verizon’s acquisition of Terremark Worldwide ($1.8 billion EV, 5.4x TTM revenue).

The primary driver behind eBay’s acquisition of GSI Commerce was its need to grow its large merchant business as its SMB business slows.  Following its acquisitions of mobile solution providers CriticalPath, Milo and RedLaser, eBay is investing heavily into multi-channel commerce, seeking to leverage its PayPal asset as much as possible.

The Verizon and CenturyLink acquisitions were driven, in both cases, by a legacy telecom’s strong need for cloud hosting infrastructure.  A similar, but considerably smaller, deal was Time Warner’s purchase of NaviSite ($326 million EV, 2.5x TTM revenue), in February.

Smaller Internet providers were clearly in demand by acquirers in 2011. Targets with revenue less than $100 million received a median EV/Revenue multiple of 2.8x, nearly 30% more than the median 2.2x paid to those with revenue greater than $100 million (Figure 59).  Smaller, faster growing Internet companies with market traction and cutting edge technologies were deemed highly strategic and worthy of a premium by many buyers. Case in point: DG FastChannel’s acquisition of MediaMind.  DG FastChannel needed online advertising expertise badly, as advertisers demanded solutions that could simultaneously manage multi-channel campaigns. Another highly strategic Internet deal: AOL’s acquisition of HuffingtonPost, which came at a time when CEO Tim Armstrong aggressively sought to remake AOL into an online content business, monetized through advertisements.

Four of the ten product categories we track in the Internet sector recorded over 100 M&A transactions each in 2011: Ad Tech & Services (185), eCommerce (162), Content (119) and Social Technologies (112).  Ad Tech & Services transactions were up 107% from 2010’s tally, in no small part due to considerable consolidation among daily deal sites following the successes of Groupon and Living Social.  The consolidation was largely driven by the critical need to rapidly achieve scale in an industry with low barriers to entry.

Deal activity in the Ad Tech & Services category was also driven by a shift in Internet advertising to audience buying and demand side platforms (DSPs), which require advanced tools to aggregate and analyze data in order to serve up the most personalized ad possible.  Notable transactions in this product category include Google’s acquisition of AdMeld ($400 million EV); ValueClick’s acquisition of Dotomi ($278 million EV); Demand Media’s acquisition of IndieClick Media Group ($14 million EV); Google’s acquisition of Daily Deal GmbH (transaction details undisclosed); comScore’s purchase of AdXpose ($19 million EV); Local.com’s acquisition of Screaming Media Group ($33 million EV, 13.8x TTM revenue); and Yahoo’s purchase of Interclick ($251 million EV, 2.0x TTM revenue).  Digital ad agencies, seeking to supplement creative services with technology enabled services, were active buyers of Ad-Tech Internet companies as well: VivaKi acquired Big Fuel Communications; WPP Digital bought Rockfish Interactive; and iCrossing acquired Wallaby Group.

The e-Commerce Internet category accounted for 162 M&A transactions in 2011, the second highest among all Internet categories, and 36% higher than its 2010 total of 119.  Consolidation in this category was driven by bricks and mortar retailers and others seeking to capitalize on the growing consumer shift to online retail, and by acquirers seeking advanced technologies for retail personalization and supply chain optimization. Unsurprisingly, eBay was the most active buyer in this category, gobbling up 13 consumer retail Internet companies in 2011.  Google and Groupon each made two e-Commerce acquisitions.

The third most active Internet category was Social Technology, which recorded 112 M&A transactions in 2011.  Buyers sought to tap the extraordinary ability of social networks to promote brand awareness and create consumer demand.   Salesforce, after publicly declaring enterprise social media as one of three key strategic objectives for their next generation cloud platform, acquired Radian6 ($350 million EV); Constant Contact bought Bantam Networks ($15 million EV) 13 days after stating on an earnings call it would be moving aggressively into social media; SuccessFactors acquired Jambok, following its 2Q10 acquisition of enterprise social network provider CubeTree ($49 million EV); Adobe purchased Demdex (transaction details undisclosed) to add behavioral targeting capabilities to Adobe’s Online Marketing Suite, acquired with Omniture in 3Q09; and Glam Media bought Ning ($150 million EV estimate), a social networking platform that enabled consumers to quickly create social media groups around any area of common interest.

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