Mergers and Acquisitions – What Does it all Mean?

In the latest major acquisition announcement to rock the industry Yahoo revealed that it will acquire BlueLithium for roughly $300 million in cash. Yahoo said its purchase of the three-year-old company will allow it to accelerate its advertising, product and engineering plans, and provide increased capabilities to sell and measure performance-based campaigns both on and off the Yahoo network.

2007 has been a wild year for merger and acquisition activity in the online marketing industry. We’ve all heard the stories of companies merging, acquiring, or being acquired. And we’ve all heard about the large sums of money flowing around the industry, funding these transactions. The intent of this article is to give you a short summary of what’s really happening, and then try to draw a picture of the future based upon present activity.

According to investment bankers Petsky Prunier LLC,

“Merger and acquisition activity in the marketing industry increased exponentially in the first half of 2007, surpassing the pace set during a record year of deal making in 2006. Companies involved in the marketing services, marketing technology & digital content and commerce sectors announced 208 transactions totaling $34 billion in aggregate deal value. As recorded by marketing industry focused investment bank, Petsky Prunier (“PPLLC”), total deal value rose by 134 percent over the first half 2006 value of $14,6 billion and exceeded the $28 billion of record deal value for all of 2006 by 21 percent.”

The marketing services segment experienced by far the most deal activity in the first half of 2007, racking up 150 transactions, totaling approximately $31 billion in value. That’s up by 171 percent over the first half of 2006 in the same segment. While these numbers include offline segments such as production and mailing, direct marketing agencies, in-store advertising, call centers, etc., a full 47 percent of the deal volume was made up of transactions involving interactive agencies, ad networks, search, SEM/SEO, online lead generation, mobile advertising and email. That’s approximately $14.5 billion dollars spent to acquire companies in the interactive marketing industry.

The following is a list of the top four transactions in the interactive marketing segment:

1. Microsoft Corporation acquires aQuantive, Inc. (Interactive Agency) for $5.7 B

2. Google, Inc. acquires Hellmen& Friedman LLC (Ad Networks) for $3.1B
3. Yahoo, Inc. acquires Right Media, Inc. (Ad Networks) for $680 M

4. WPP Group acquires 24/7 Real Media, Inc. for $644 M

It’s important to note that while these four transactions got the majority of the press, there is actually another $4 billion in 86 smaller transactions which have taken place across the industry since the beginning of 2007. That’s no small change, and is definitely affecting the face of the industry.

With those statistics in mind, let’s attempt to look forward and project where the industry is headed. In doing so, it’s important to note that out of the top four deals, three were made by “strategic buyers” as opposed to “financial buyers.” Strategic buyers are companies already positioned on the Internet who are looking to use company purchases as part of their long term expansion strategies. Financial buyers are investors, seeking to maximize acquisition value, with an exit strategy always in mine.

Though both financial and strategic buying have seen a significant increase, it’s notable that this year has seen the strongest action buy strategic buyers such as Microsoft, Google Yahoo and WPP. Looking forward, this represents the maturing and consolidation of the industry into a top tier of mega players. When these deals close in 2008, combined, Google and Yahoo will control somewhere near sixty percent of all search inventory. And if things continue as expected, WPP|24/7 Real Media will be the top search buyer.

Is this good or bad for the industry? It’s the age old debate that takes place in every maturing industry. Certainly the current round of consolidation will lead to more streamlined procedures and standardization throughout the process for advertisers. And that’s good, because the easier the process is, the more money will be spent online for interactive advertising. And the more money that flows into the industry, the stronger the infrastructure will be (both from the technological and human sides). Money attracts talent, and talent solves problems. So certainly in this regard, the industry consolidation can be seen as a positive.

On the flip side, the stronger the mega players, the more they are able to dominate the playing field and make the rules. And those rules often don’t benefit the smaller players. Again, that’s part of the nature of industry consolidation. So as standards and procedures become more settled on the top tier, look for those developments to have a potentially negative effect on smaller players in the industry. As always there will be room for upstarts and niche players. But certainly the barriers to becoming a top tier player grow larger and larger as the industry continues to consolidate.

As we move towards the end of 2007, it seems that we should be on the lookout for continuing industry consolidation. Short of a nationwide economic slow down, the deals will just keep coming, and there’s no end in sight. Whether this is good or bad for you and your company is a call only you can make.

____________________________________________________________

Come back to the iLegal column every week as we get specific about the rules, regulations, laws and trends that affect the online advertising industry. Each week we discuss important legal issues, talk about how to avoid the pitfalls, and cover the breaking legal and regulatory advertising industry news.

Legal Disclaimer: Information conveyed in this column is provided for informational purposes only and does not constitute legal advice. These materials do not necessarily reflect the opinions of Digital Moses, and is not guaranteed to be complete, correct, or up-to-date. The column is provided for "information purposes" only and should not be relied upon as "legal advice." This information is not intended to substitute for obtaining legal advice from an attorney. No person should act or rely on any information in this column without seeking the advice of an attorney.

Mark Meckler is the General Counsel for UniqueLeads.com, Inc., and Unique Lists, Inc. Mark sits on the eCommerce and Technology Committee of the Association of Corporate Counsel, and is a member of the International Association of Privacy Professionals.

Copyright 2007 Mark J. Meckler