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Internet & Software
ContactSandeep Aggarwal
415-659-2260saggarwal@collinsstewartllc.com
Stan Velikov, CFA
415-659-2241svelikov@collinsstewartllc.com
New York
Collins Stewart LLC350 Madison AvenueNew YorkNY 10017(212) 389 8000
San Francisco
Collins Stewart LLC22nd Floor 456 Montgomery StreetSan Francisco, CA 94104415 659 2222
London
Collins Stewart Europe Limited9th Floor 88 Wood StreetLondon EC2V 7QR+44 (0)20 7523 8000
Dublin
Collins Stewart Europe LimitedFirst Floor South Dock HouseHanover Quay, Dublin 2+353 1 635 0210
September 30, 2009
Top M&A Themes for the Internet
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Summary
M&A activity has been picking up in the Internet sector since Jun '09, andin the coming quarters, we expect to see even more. In our view, this isnot only a sign of increasing confidence in economic recovery but also amajor reinforcement that the Internet continues to experience high secular growth and is getting more widely adopted. This secular adoption of theInternet creates need among the largest Internet companies andcategory-leaders to view M&A not only to create a bigger fish net for their suite of offerings but also to develop competitive moats around their coreofferings. With the evolving needs in the Internet, the largest Internetcompanies are taking advantage by acquiring -- top talent, killer applications, geographical/category focused companies, or companiesoperating in newer categories. After some lag, currently reasonablevaluation expectations by Internet start-ups are making acquisitionseasier. In our view, all of the top 5 largest Internet Co's (AMZN, EBAY,GOOG, MSFT, and YHOO) will likely be acquisitive during the remainder of '09 and '10 with YHOO and GOOG leading the pack.
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Top 10 M&A themes for the Internet
1) Cloud computing; 2) Mobile Internet; 3) Social media; 4) Vertical adnetworks; 5) Vertical content Sites; 6) eBook reader; 7) International; 8)Web analytics; 9) Interactive agencies including SEM agencies and other marketing servicing companies; and 10) Comparison shopping.
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Top likely Internet acquisition targets or IPO candidates
Private: Facebook, LinkedIn, Twitter, Coremetrics, Eye Blaster, EyeWonder, Education Dynamics, Glam Media, eFrontier, JumpTap, Meebo,Zillow, eHarmony, Digg, Exact Target, Rock You, Slide, Foresee, andYelp. Please refer to page 3 for our top 100 private Internet companieslist. As far as public Internet companies are concerned, we believe that:SCOR, TTGT, and VCLK are the likely acquisition targets. Additionally,vertically-focused content/E-Commerce companies and marketingservices companies especially web analytics screen very well.
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Why are Internet M&As picking up?
Large public companies' requirements: expand geographically or inadjacent categories; acquire talent; participate in evolving categories;strengthen competitive moats around core offerings; buy traffic; acquiretechnologies. Small public or private companies' situation: expectationshave come down to more reasonable valuation multiples; low visibility intonext round of funding (inactivity by VCs); lack of economic viability; andpositive cash flow from operations getting delayed.
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Internet M&A and major deals so far
There have been many noticeable M&A deals in the past 3-4 months:Gmarket/EBAY, RATE/Apax Partners, Zappos/AMZN, Mint/Intuit,FriendFeed/Facebook, Skype/PE firms (Silver Lake, Index Ventures, etc.),Omniture/Adobe, Pepperjam/GSIC, etc.
Company Ticker Price Rec.
Amazon.com Inc. AMZN $91.72 HOLDcomScore Inc. SCOR $18.12 HOLDDigital River DRIV $39.70 HOLDeBay Inc. EBAY $23.87 BUYGoogle Inc. GOOG $498.53 BUYGSI Commerce GSIC $19.11 BUYMicrosoft Corp. MSFT $25.75 BUYOmniture Inc. OMTR $21.47 HOLDTechTarget TTGT $5.72 HOLDValueClick Inc. VCLK $12.95 BUYYahoo! Inc. YHOO $17.45 BUY
Please see page 3-5 for price targets,valuation methods, and risks toachieving those targets.
Disclaimers regarding the content of this report as well as full disclosure of Collins Stewart LLC's ratings and information on the firm's position(s) insecurities mentioned herein appear on pages 6 - 11 of this report.
Top Internet M&A Themes
Below we present the top 10 Internet M&A themes for next 18 months andmatch them against top 5 Internet companies in terms of our assessment ofthe requirements by the top 5 Internet Cos. More cross marks means higherrequirements relative to others.
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Internet M&A ThemesAMZNEBAYGOOGMSFTYHOO
1Cloud ComputingXXXXXXXXX2Mobile InternetXXXXX3Social MediaXXXXXXX4Vertical Ad NetworksXXX5Vertical Content SitesXXX6eBook ReaderXXXXX7InternationalXXXXXXXXXX8Web AnalyticsXXXXX9Interactive Agencies10Comparison ShoppingXXXXSources: Collins Stewart LLC estimates
Internet M&A Themes & Requirement by Top - 5
Top Internet Private Companies and Top – 5Requirements
Below we present a list of top 20 Internet companies (with a consumerInternet brand bias) and match them with top – 5 largest Internet companiesin terms of our assessment on logical match. Though many of these top 20private Internet companies will very likely go IPO (e.g. Facebook) but weare highlighting logical match with top 5 Internet companies, should theprivate Internet companies decide M&A as exit. In our view, out of the top 5Internet companies, YHOO and GOOG will likely be the most acquisitive.
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Internet CompaniesAMZNEBAYGOOGMSFTYHOO
1Core MetricsXXXXXX2Daily CandyXXXX3DiggXXXXXX4EdmundsXXXXX5eHarmonyXXX6FacebookXXXXXX7FoolXXXXX8Glam MediaXXXXX9Hi5XXXXXX10HuluXXXXX11JumptapXXXXXXX12KayakXXXX13LinkedinXXXXXXX14NingXXXXXX15SecondlifeXXXXXXX16TechcrunchXXXX17TwitterXXXXXXX18YandexXXXXXX19YelpXXXXXXXXX20ZillowXXXXXSources: Collins Stewart LLC estimates
Leading Private Internet Cos & Requirement by Top - 5
Top 100 Private Internet Companies
Below we present our list of top-100 private Internet companies. Majority ofthem are independent but some are either owned by private equity firms or
Page 2 | Internet & Software | September 30, 2009
by a larger corporation. We expect majority of these companies to beacquisition target but for some we expect IPOs e.g. Facebook.
#NameDescription#NameDescription
14INFOMobile Advertising51KayakOnline Travel256.comOnline Video52Linden LabVirtual World Platform3AdBriteAd Network53LinkedInSocial Media4AdconionAd Network54LinkExpertsSEO Agency5AdifyAd Network55LoveFilmOnline Video6AdMobMobile Advertising56MahaloSearch Engine7AKQAInteractive Agency57MeeboWidget8Audience ScienceAd Network58MetacafeOnline Video9AzoogleAd Network59MevioOnline Video10BablegumOnline Video60Mozilla CorpBrowser11BecomeE-Commerce61NetShelter Technology MediaVertical Ad Network12BetfairOnline gaming62NextagComparison Shopping13Burst MediaAd Network63NingSocial Networking14Casale MediaAd Network64OandaContent - Finance15CertonaOptimization SaaS65OzonE-Commerce16Collective MediaAd Network66PandoraInternet Radio17ContextWebAd Network67PhotoboxSocial Networking18CoremetricsWeb Analytics68Pulse360Ad Network19CPX InteractiveAd Network69QlikTechBusiness Intelligence Software20CraigslistClassifieds70Range OnlineSEM Agency21Daily CandyContent71Rock YouWidget22Demand MediaAd Network72RosettaInteractive Agency23DiditSEM Agency73Six ApartSocial Media24DiggSocial Media74SlashdotWidget25EdmundsContent - Auto75SlideWidget26Education DynamicsOnline Education76Specific MediaAd Network27Efficient FrontierSEM Agency77Spot RunnerAd Network28eHarmonyOnline Dating78StardollSocial Networking29EtsyOnline Marketplace79Strong MailEmail Marketing30ExactTargetEmail Marketing80TechCrunchSocial Media31Eye BlasterMarketing Services81TechnoratiSocial Media32Eye WonderMarketing Services82TheLaddersEmployment Website33FacebookSocial Media83ThumbplayMobile Content34Federated MediaSocial Media84Travel AdnetworkVertical Ad Network35FiftyOneE-Commerce Platform85TrialpayOnline Payments36FoolContent - Finance86Tribal FusionAd Network37ForeSeeWeb Analytics87TruliaOnline Real Estate38FriendsterSocial Media88TudouOnline Video39Gawker MediaSocial Media89TwitterSocial Media40Glam MediaVertical Ad Network90Vibrant MediaSEM Agency41HabboSocial Networking91WebkinzVirtual World Platform42HakiaSearch Engine92WhitepagesLocal Advertising43Hi5Social Media93WikipediaSocial Media44HuluOnline Video94YandexSearch Engine45iCrossingSEM Agency95Ybrant MediaAd Network46IndeedEmployment Website96YelpSocial Media47InterCLICKAd Network97Yes MailEmail Marketing48iProspectsSEM Agency98YoukuOnline Video49JoostOnline Video99ZazzleE-Commerce50JumptapMobile Internet100ZillowOnline Real Estate
Source: Company Websites; Collins Stewart LLC
Top 100 Private Internet Companies
Valuation
EBAY:
We reach our $29 PT by using P/E and P/FCF multiples on our ‘10estimates. We assign a multiple of 16x to our 2010 EPS of $1.74 to reach$28. We assign a 15x multiple to our 2010 FCF of $1.87 to reach $28. Weadd $1 per share premium to each of our valuation methods for better-than-expected Skype deal (rounding up the average). We are giving highermultiple to eBay because in addition to recovery in E-Commerce there aretangible evidences of transformation in EBAY’s Marketplace and the
Page 3 | Internet & Software | September 30, 2009
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