Web Acquisitions and Investment:
Perspectives and Outlooks For
The E-Commerce Evolution
Donald R. Libey
Libey Incorporated
Advisors and Intermediaries for the Direct Marketing
Industry
Today's e-commerce world is a constant moving target. From euphoria to
desolation, the marketplace and investment ethos have experienced every
emotion and outlook conceivable during the past two years; the model for e-
commerce business has changed repeatedly and has embraced multiple life
forms, resulting in mutations and morphological hybrids heretofore unknown
and not well understood by traditional direct and catalog marketers. This
Libey Trends Report seeks to provide perspective, offer understanding of the
evolutionary processes relative to valuations, sectors, models and participants
in the changing, contemporary e-commerce milieu.
About The Author: Donald R. Libey is co-founder of
Libey Incorporated, the investment
banking firm to the catalog industry, located in Philadelphia, Pennsylvania and Haddon
Heights, New Jersey. A Strategic Partner with MeritDirect, Libey Incorporated provides
INTERMEDIARY SERVICES, capital raising and venture capital placement, and financial
and strategic advisory services to owners, CEOs and boards of directors of catalog, direct
marketing and e-commerce companies.
Perspective
The pace of acquisitions of web sites increased from 1998 to 1999.
Approximately $6 billion was spent in 1998 for nearly 150 known web site acquisitions.
Using these numbers as a base, the 1999 activity increased to approximately $48 billion
and nearly 460 web site acquisitions, a 525 percent increase on expenditures and an over
200 percent increase on deal volume.
Contrary to the prevailing belief that the e-commerce investment boom is over,
we at Libey Incorporated believe it is, rather, entering a new, inevitable and attractive
period of transformational evolution. The initial years of e-commerce investment created
the skeletal infrastructure; enormous amounts of fodder and raw materials were required
to accomplish this rapid and technologically astounding era. The fodder, comprised of a
plethora of ill-conceived but essential e-commerce nutrients, or business start-ups, have
now served their function as fertilizer and they will be allowed to rot and to nourish the
now prepared growing ground for the real e-commerce world. We see the sure sign of
that new stage of development in the shift from disparate acquisitions to acquisitions that
now resemble logical consolidations. Stated another way, for the first time in the short
lived history of e-commerce, the acquisitions beginning to occur are of similar businesses
rather than just "breakthrough" ideas. When the industry exhibits these true symptoms of
real consolidation, it is a logical conclusion that structure and order are beginning to
emerge. The final half of 1999 saw true consolidation activity reflected by an increase to
about 25 percent of the dollar volume in the third quarter up from an overall less than 5
percent during the first half of the year. Consolidation of healthy structure in contrast to
new content fodder is a vigorous sign of future potential.
To further support our perspective, we note that the e-commerce development has
also increasingly focused on vertical development from horizontal development. The
acquisitions of specific types of web sites (verticals) as opposed to broad concepts
(horizontals) have increased significantly. Investment in horizontal sites accounted for
nearly 85 percent we estimate in 1998, but dropped to less than 70 percent in 1999, an
increase in vertical site investments was seen in offsetting amounts. When a
marketplace—like a catalog—begins to develop vertically, it is beginning to assume a
maturity.
Even with the current shake out, Libey Incorporated believes the industry will
recover and post significant gains in the 2000-2001 time period. Our confidence comes
from the experience of the past. If one looks at historical market evolutions, one can see
clear parallels. The television technology and market development of the 1940s and
1950s has the very same earmarks, as do the cellular and facsimile technologies and
marketplaces. Increased consolidation, vertically and horizontally, is likely to be
experienced for a number of years in the future. As the winners and losers are revealed,
the winners will become hungry, especially as exhaustion bargains appear. The frenzy
for vertical domination will heat up and the ripening and cash-poor low-hanging fruit will
become consolidation targets. Large companies will solidify their future positions,
especially where deep pockets provide a financial first entry advantage. In the end, it's
still all about building lasting barriers to entry.
And, finally, there will be a definite focus shift from consumer evolution to
business to business evolution in web-based business, especially as the realization of the
solid economics of business to business registers over the "iffy" economics of a fickle
and often petulant consumer universe.
The first quarter 2000 acquisitions activity is, in fact, significantly increased over
1999. It is estimated that over $220 billion has been spent on acquisitions during January
through March 2000, and that contrasts to an estimated $15 billion in the same period of
1999. If the data is smoothed to deduct the $157 billion AOL/Time Warner merger, the
results still are an increase of $48 billion, a figure higher than the GNP of most nations
of the world. The number of deals is estimated to be near 230 for the first quarter, up
from about 50 deals in the same period 1999. So, the stock market devastation has, in
fact, not dampened the deal flow as is generally believed; it has, however, caused a shift
in the type of deal and the quality of deal flow. As one might have suspected, real assets
and real earnings potential are, once again, preferred.
It is true that business to business deals account for the great bulk of the market
vitality in acquisitions; consumer deals are increasingly rare. Business to business
acquisitions total nearly 30 percent in the first quarter with $17 billion spent compared to
less than 5 percent and under $3 billion in first quarter 1999. And, in the b2b arena, the
vertical markets with the greatest acquisition activity continue to be computer technology
and health care related. Of the $17 billion spent on b2b acquisitions and investment, the
bulk was spent in b2b exchanges and supply chain consolidation structures, such as the
Big Three auto makers' announcement of a joint web supply exchange formation.
The one astounding fact seen in the first quarter of 2000—portending phenomenal
change ahead—is the shift from advertising revenues of web sites to fees. A related
article in the Libey Incorporated web site section, Library, titled "Five Defining Trends In
the Catalog Industry" (www.libey.com) describes this tectonic shift to transaction fees
from traditional mark-up. Over three-quarters of all the investments thus far in 2000 are
in business models describing fee-based revenues. The death of advertising-based web
site revenue streams appears to be at hand.
Prediction
Libey Incorporated is optimistic—for increased acquisition activity. This is an
important distinction from increased web industry investment activity. We believe the
important shifts we have described will lead to a period of intense market weakening for
operators of web-based organizations. In turn—as is unique to American businesses—
there will be a cannibalization and thinning process of the weaker existing web
companies with a resultant conquering wave of bottom feeders entering the industry from
the ranks of retailing, services, MRO, and dominant supply chain leaders with long-
standing investment platforms and near-unending supplies of cash. The recent bumper
crop of distressed e-commerce companies will be eaten, digested and converted to
nourishing energy for the benefit of "The Bigs." Valuations will decline dramatically
and liquidity will be near-non-existent, culminating in a drop in IPO activity and a rise in
M&A activity. Distressed publicly traded e-com, content, e-tail and pure play companies
will be sacrificed on the block. The emergent companies will be huge, powerful, ruthless
and dominant. We also believe venture capitalists will leverage the future by increasing
their investments in startups; however, the startups will now require solid strategic,
business and financial plans, real universes, real products, real customers and real,
experienced operators. And that is the way it has always been. Indeed, there is little
under the sun that is new.
