Sunday, December 10, 2006

Top 10 Best Internet Acquisitions Ever

Well, the list of the Top Ten Worst Internet Acquisitions Ever certainly generated a lot of buzz. There's bound to be disagreements on what constitutes a horrible or a great acquisition, but the point of such lists is to get people in the industry to stop and think for a moment before hurtling headlong into the next bungle.

My thoroughly subjective list of the top 10 internet acquisitions took much longer to compile than the worst 10, and maybe that says something about the quality of buyouts over the last 10 years. Some folks have beaten me to the punch with their own top 10 acquisition lists, so here's my take:

10. Shopzilla - acquired by Scripps in June 2005 for $525 million. This is a rare example of a traditional media company buying an Internet service that actually makes both entities better. Shopzilla is a comparison pricing engine and Scripps has been able to plug in their existing advertiser base, making the Shopzilla service not only better but more profitable. In the year and a half since the acquisition Scripps was able to double Shopzilla's revenues and more than triple profits.

9. Network Solutions - acquired by SAIC in 1995 for $4.5 million. This isn't an acquisition that created a great strategic fit or allowed the acquiring company to change its position in the market. This is an acquisition that just plain made money. After SAIC acquired Network Solutions, the domain name registrar, for a paltry sum in 1995, the company was later sold to VeriSign in 2000 for - wait for it - yes, $21 billion. I'm not going to even try to calculate a rate of return for that one.

8. YouTube - acquired by Google earlier this year for $1.65 billion. Heard about this one? :-) I realize this is a brand new acquisition and I'm also aware that this might be considered one of the 10 worst by some people, but here's why it makes number eight on my list: video advertising. The next phase in Internet advertising will undoubtedly be video-based and many think this market will be several times larger than the text-based ads that are Google's current bread and butter. Google Video was not a market leader - YouTube is. If this acquisition gets Google even a little closer to dominating the video ad market as it has the text ad market, it will pay for itself many times over.

7. ZiffDavis - acquired by CNET for $1.6 billion in 2000. ZiffDavis was the parent company of ZDNet, at the time CNET's fiercest competitor. Since the acquisition ZDNet has been (in my view necessarily) severely downsized and repositioned - so why is this in the top 10? Because with one move CNET was able to eliminate its closest competitor, cementing its position as the top place to turn for tech-related information. While CNET may have issues that it's grappling with now, imagine the position it would be in if Yahoo! had bought ZDNet back in 2000.

6. Overture - acquired by Yahoo! in July 2003 for $1.63 billion. Yahoo! was smart enough to realize quickly the implications of Google's acquisition of Applied Semantics (see below). At the time of the acquisition Overture accounted for 20% of Yahoo!'s revenues and I would imagine that share has gone way up over the last 3 years. Even though Yahoo! currently is developing its Panama system to replace the Overture technology, this acquisition allowed Yahoo! managed to stay in the search game, at least until now.

5. Advertising.com - acquired by AOL in June 2004 for $435 million. AOL wisely decided that having a closed network and being in the Internet access business was not the right direction to go. The acquisition of Advertising.com, an interactive ad firm, became a centerpiece for AOL's focus on generating advertising revenue to replace the connection fees it had traditionally relied upon. The very strong quarter that AOL last announced indicates this was exactly the right move to make.

4. Four11 - Acquired by Yahoo! for $92 million in 1997. Four11's Rocketmail service became Yahoo! Mail and Yahoo! was one of the first portals to offer a free email service. Unlike Microsoft's acquisition of Hotmail later that year, Yahoo! did a great job of integrating the email service with the rest of its offerings. Over the last 10 years, web-based email has been one of the absolute most sticky applications that Yahoo! has. For less than $100 million Yahoo! was able to leapfrog its portal-wannabe competitors and create a service that millions of its users still rely upon to this day.

3. Applied Semantics - acquired by Google in April 2003. Applied Semantics originally developed the AdSense technology that delivers text advertisements to web pages based on keyword relevance to the page. This has become the cornerstone for Google's dominance and is responsible for generating billions upon billions in profits for the company. Before this acquisition Google was a great search engine. After this acquisition Google became a great search engine that mints money.

2. PayPal - acquired by eBay in 2002 for $1.5 billion. This was an obvious acquisition for eBay, but one that nonetheless has helped fueled its growth. After trying to compete with PayPal by offering its own payment transaction system, eBay smartly realized that it was too late - PayPal had already become the default payment system for the vast majority of eBay auctions. Rather than sticking to its guns and trying to outlast PayPal, eBay listened to its users. PayPal is now integrated into every aspect of eBay and accounts for a huge amount of its revenues.

1. mySpace - acquired by News Corp. in July 2005 for $580 million. While mySpace may some day be remembered as nothing more than an annoying assortment of ugly web pages, the News Corporation's acquisition of Intermix, mySpace's corporate parent, immediately vaulted the company to a leading position on the Internet. Contrary to many predictions, mySpace has continued to grow like crazy since the acquisition and the News Corp. has wisely left it largely alone. MySpace gives the News Corp. an enormous platform to distribute music, videos, and anything else it can think of to an audience of millions of young people. It's not surprising that a year after the acquisition, New Corp. now claims that mySpace is worth more than 10 times what it originally paid for the company.

Like any list there were some close calls that didn't quite make it (such as AOL acquiring Mirabilis) and perhaps others that didn't even occur to me. But lists like this one are meant to generate discussion, not to serve as an official accounting. So go ahead, tell me what I missed or what you agree with.

Disclosure: I am long on CNET. I don't own shares in any of the other companies mentioned.

42 comments:

Scott A. Edwards said...
This comment has been removed by a blog administrator.
Kelley Equity Research said...

great post -- but you didn't mention how much GOOG paid for applied semantics -- do you have any idea?

best
DJ

Anonymous said...
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Great blog and I couldn’t agree with you more. I think the jury is out on YouTube with all of the copyright issues involved. Although I think MySpace is a fantastic purchase, it is going to have to be handled very carefully, as I pointed out in a recent blog entry.....

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