‘Google Effect’ Spurs M&A Activity

Wonder what’s behind the recent spate of Internet-related M&A? The answer is Google. The search company’s “rise has generated a fair amount of fear and uncertainty in established players, who feel compelled to be more aggressive in adding new services and features,” says venture capitalist Bill Burnham. Burnham is a managing director at Celsius Capital in Palo Alto, Calif., and a former e-commerce analyst at Credit Suisse First Boston. He says that it’s no coincidence that AskJeeves, Flickr and Snapfish were snapped up last week.

Google’s market cap hit $49 billion, topping eBay’s $48 billion and Yahoo’s $43 billion, giving it plenty of currency to go on a buying binge. Tor Braham, co-head of technology investment banking at Deutsche Bank Securities in New York, agrees that Google’s rise is behind the recent rash of M&A. He says that he’s currently working on 15 Internet M&A transactions. “There’s a huge wave of consolidation happening and we’re still only in the second to third inning,” he says.

Over at Perseus Group in San Francisco, managing director Steven Fletcher is fielding an increasing number of calls from companies looking to buy advertising and search technologies. “Google’s a huge factor,” he says. “We have a dialogue with most of the major Internet players and all of them are looking for acquisitions driven largely by the development of the advertising/search space. I’d say that there’s much more activity than last year.

The whole ecosystem around Google is good for venture-backed startups looking for an exit, says Gary Little, a general partner at Morgenthaler Ventures in Palo Alto, Calif. “From an investor standpoint, it’s the best example of the new economics of the Internet in terms of attracting and monetizing users,” he explains. “The fact that Google and Yahoo are growing so fast and so profitably is an indicator that their customers are also growing profitably on the Web. Otherwise, those customers wouldn’t be spending the money that’s going into Google’s and Yahoo’s coffers.

Last week, Barry Diller’s InterActive Corp. (IAC), which owns Expedia and Hotels.com, announced its $1.9 billion acquisition of publicly traded search engine AskJeeves in an effort to compete with Google in the online advertising market. Fletcher suggests that DoubleClick, the once high-flying online advertising company, may be IAC’s next big acquisition.

Three other deals were more subtly reactionary — and doubtless less expensive. Yahoo bought the Canadian photo-sharing site Flickr, which lets people upload digital images from computers and camera phones, publish them in their blogs, and share them with other Flickr users. In short, it allows Yahoo to better compete with Google in the fast growing business of social networking, which Google entered into last year with the launch of its social network service called Orkut. Meanwhile, Hewlett-Packard Co. snapped up photo site Snapfish for similar reasons, and newspaper giants Knight Ridder, Tribune and Gannett each bought 25% of Topix.Net, a search company that scans the Web and aggregates headlines from thousands of sites by topic and geography. No terms were disclosed for any of the deals.

Flickr and Topix.net were bootstrapped by their founders and hadn’t received institutional backing; Snapfish was bought from a company called District Photo Inc., which purchased it from its venture investors in 2001. Companies, such as Yahoo and HP, are also investing in nascent technologies that help them compete with Google, says Brad Burnham, a managing director of Union Square Ventures in New York (and no relation to Bill Burnham).

As an example, Burnham of Union Square points to Flickr, which “had no revenue and no obvious way of getting revenue,” he says. “The thing about it is that it’s a new way to get information,” he says. “Google transformed the ability to find the information that you wanted to find.

Newer upstarts, such as Flickr and RSS startup Technorati as well as Del.icio.us, a social bookmarks manager, are broadening what people can find are fundamentally different than search, he says. Technorati and Del.icio.us. have not been acquired. Technorati has raised an undisclosed amount of venture funding from August Capital, Mobius Venture Capital, and Draper Fisher Jurvetson; Del.icio.us has not announced any institutional backing.

Email Constance.Loizos@thomson.com