Internet-Reliant Sector M&A Activity and Insights
Intangible Insights analyzes the Internet industry by functional area and by vertical. The functional areas, which we believe represent the vast majority, if not all, Internet-Reliant companies, are categorized using standard industry definitions for Content & Media, Applications, Merchandising, and Offline Service (not included in the index). We try to include pure play companies for each functional category in the 2i Stock Index, but some companies cross functional boundaries (e.g. Amazon, which generates significant merchandising revenue through the sale of third-party products but also has viable and growing revenue from its Amazon Web Services, an application function.) We include these firms because of their industry leading status.
2i Stock Index of Internet-Reliant Companies
We update our index and the metric tables weekly on the 2i website. We intend to post a blog on the site later this month explaining our selection of the companies in the index and the metric information we find meaningful.
2i Stock Index
The 2i Stock Index of Internet-Reliant companies offer these insights:
All three functional categories fared better over the year than the S&P. From April 2008, each started with about a 20% discount from the S&P but closed Q1-2009 with a 10% to 20% premium over the S&P.
The best functional performing group in Q1-2009 was Merchandising and Application index which gained 1% while the S&P and Content/Media index dropped 11% each compared to Q4-2008.
Although we believe the Application sector offers the most start-up and M&A opportunities in the Internet space, we attribute the Merchandising sectors’ performance to the recession and consumers’ desire to spend frugally. Amazon’s dominance of the functional category with a stock price that has gained 43% since end of Q1-2008 and trading at PE of 41.5X as of the end of Q1 (up from 35.2X PE of Q4-2008) also contributes to the sectors overall performance.
We do not include offline service providers as a functional category in the Index because the “offline service provider” label represents too wide a disparity of product and service offerings and business models. We include these firms in our overall analysis on the 2i site and our investment banking practice they are active players in the sector. However, comparing financial and valuation metrics of these companies to our other categories is not particularly meaningful.
Internet-Reliant M&A Activity
Please note that the Internet-Reliant industry is highly fragmented, dynamic, and largely dominated by small companies (number of companies, not necessarily by market share or share price). Innovations, and information in general, are closely guarded, since it can easily be replicated by competitors. We do our best to provide accurate information, particularly as it relates to valuations, but most deals are private and disclosure is rare.
We draw on data from a variety of sources to compose the list of companies discussed in this section. Although we group all the Internet-Reliant M&A deals into our three functional categories, our criteria to compose the list includes over 100 key words or phrases and company sub-categories ranging, for example, from Agents and Spider Software to Web Usage Analysis. Certainly not perfect at any given time, our criteria are fluid and change as the industry and our reporting purposes evolve.
Of the 199 Internet-Reliant deals closed in Q1-2009, 167, or 84%, were of private companies and no disclosure was required. Of the remaining 32 deals (see Table A-1 in the Appendix section below), only 10 disclosed last twelve month (LTM) revenue figures and four of those disclosed LTM EBITDA figures. We don’t consider this information to be decidedly helpful for valuation purposes. Instead we try to draw meaningful insights, if not valuation data, from the transactions for which we have better information and offer greater detail on the Intangible Insights site under the category Deal of the Week.
Chart 4: Internet Reliant Companies Transaction Volume by Deal Size
In Q1-2009 there were a total of 199 internet deals, including announcements, down from 238 in Q4-2008, and down from 345 deals Q1-2008, or 42% year-over-year decline. The Q1-2009 average deal value was $32.4M but this is skewed upward by the outlier Autonomy-Interwoven deal, which closed for about $775M in March.
Table 4: Actual Number of Reported Internet Deals
The table above shows a statistical breakdown of transactions reported in the Internet-Reliant space. The reader will note that the overwhelming majority of transactions completed do not report financial metrics for the deal. This is a reminder of our skepticism to base anticipated value of a company purely on multiples alone. Each transaction has its own unique value proposition for a buyer and seller – another reason why we focus more on strategic buyers as opposed to financial.
Chart 5: Internet Reliant Companies Transaction by Geography
Europe slightly outpaced the US in the number Internet-Reliant M&A transactions for the past two quarters. We note this as a reminder that the internet-Reliant space is truly one that has buyers and sellers across the globe regardless of geography. At Focus, we have seen an increase in cross border deals that we have been completing over the past few years. Over 40% of our transactions for 2008 had a buyer or seller based outside of the US.
Chart 6 : Pie Chart of Internet-Reliant Transaction by 2i Function
The above chart shows the breakdown of Internet-Reliant transactions by the seller’s functional category. Not surprising the largest active category is Content and Media. This category has the largest pool for potential transactions, and, with the current trend towards pushing more content online, it is not surprising that it accounts for the largest portion of transactions. In future quarterly reports we will follow any trends that may emerge in categories that become more and less active.
The Table below shows the most active participants (based on deal closings) by number of transactions and by total transaction size. Strategic investors represented 87% deal closings by number of transactions and 70% by total transaction value, while financial investors represented 13% of the number of transactions and 30% by transaction value.
Table 5: Most Active Buyers/Sellers
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