Internet M&A Deal Volume and Valuations

…the Internet M&A focus shifted to a new breed of online marketing companies that had leveraged social media to help SMB customers generate leads more cost-efficiently, deemed critical in this tough economic climate..

This excerpt is from our complimentary Q3 2012 Software Industry Financial Report which can be downloaded here:  http://www.softwareequity.com/research_reports.aspx

Internet M&A activity in 3Q12 was robust, with 263 transactions announced by close of quarter, a marked YoY increase over 3Q11’s 216 Internet deals (Figure 40).  The third quarter’s 263 Internet transactions was 65% of the final tally for traditional on-premise software M&A, up markedly from 3Q10 when Internet M&A was only 30% of the on-premise software deal total.

The most active Internet M&A category in 3Q12 was Ad Tech & Lead Gen, which accounted for 85 transactions, or one-third of all Internet deals during the quarter (Figure 41).

In 1H12, many of these Ad Tech & Lead Gen sellers were daily deal sites unable to emulate the success of Groupon and Living Social by scaling quickly and massively, making them ripe for consolidation.  In Q3, however, the Internet M&A focus shifted to a new breed of online marketing companies that had leveraged social media to help SMB customers generate leads more cost-efficiently, deemed critical in this tough economic climate.  Representative third quarter transactions in this arena included Merkle’s acquisition of 5thFinger; WPP’s purchase of Acceleration eMarketing; Gannett’s acquisition of BLiNQ Media; Publicis Groupe’s successful bid for LBi International ($533.8 million); and RealPage’s purchase of Rent Mine Online ($15.5 million EV, 10.3x TTM revenue).  The largest transaction in this category was Dentsu’s acquisition of Aegis Group ($4.8 billion EV) which was a global expansion play for Dentsu.

Content & Media was also among the most active Internet categories from an M&A perspective, with 52 transactions in the third quarter.  Notable transactions in this category included Shutterfly’s acquisition of Penguin Digital; News.me’s acquisition of Digg ($0.5M EV); Google’s acquisition of John Wiley & Sons Travel Assets; and IAC Search & Media’s acquisition of About.com.  The sale of Digg to News.me is another reminder of how far and how quickly, Internet high flyers can fall.  It was only four years ago that Google was rumored to be interested in buying the high flying startup for $200M.  Four short years later, the Company needed a $5M Series D round to keep from running out of cash before ultimately selling the business for what is widely believed – albeit hotly debated – $0.5M total transaction price.

The TTM Internet M&A median exit multiple was 1.9x in 3Q12 (Figure 42), down sharply YoY from 2.6x in 3Q11.  The drop mirrors the steep Q3 decline in the median market valuation of public Internet companies, and reinforces investor concerns about the viability and sustainability of Internet revenue models primarily dependent upon advertising.  Compounding the problem is growing competition for these web advertising dollars from mobile deployed apps.  But if Facebook and Google are able to prove mobile web advertising is substantial, sustainable and incremental to desktop web advertising, Internet exit multiples for  Ad Tech & Lead Gen  providers will undoubtedly rise sharply in the not too distant future.

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