Merger Mania Could Include Many E-Commerce Buyouts, Analysts Say

Internet brokerage E*Trade (NYSE: ET), online realty company Homestore.com (Nasdaq: HOMS) and software company i2 (Nasdaq: ITWO) were among targets that came to mind when analysts were asked to pick their top e-commerce buyout candidates.

With stock prices at bargain-basement levels, these and other dot-coms like them could make good partners for brick-and-mortar companies seeking to add online operations to their existing businesses, analysts said.

Since the terrorist attacks of September 11th, "the environment has changed a little bit, but we're still going in the same direction," U.S. Bancorp Piper Jaffray senior research analyst Jon Ekoniak told the E-Commerce Times. "The big software providers are going to get bigger."

Software Sweethearts

While the current market environment makes it "tough" for companies to come up with financing for acquisitions, longer-term buyout prospects remain, the analyst said.

These could include i2, which last spring purchased e-procurement company Rightworks. Another possible target is supply-chain maker Manugistics (Nasdaq: MANU).

"They are probably attractive acquisition candidates at these levels," Ekoniak said.

Commerce One (Nasdaq: CMRC) would also be a good fit with a larger software company, such as SAP (NYSE: SAP), which already has a partnership with the company, Ekoniak said. In addition, supply-chain software maker Clarus (Nasdaq: CLRS) has a "significant amount of cash" as well as a "good product," which should make it an attractive buy for a larger software company, such as Microsoft (Nasdaq: MSFT) (Nasdaq: MSFT), said Ekoniak.

Attractive Trades

On another front where consolidation is likely, E*Trade, which at its current level of about US$6 is trading close to book value, could make a good partner for any number of potential buyers.

Bill Fries, who manages the Thornburg Value Fund, said that E*Trade could find a "nice combination" with another financial services company, either one like Schwab (NYSE: SCH) that already has online operations, or a brick-and-mortar company that wants to boost its online presence.

E*Trade has controlled spending, "so there's no cash burn," Fries told the E-Commerce Times. "They are going to be a survivor, and because of that, they will be attractive to lots of people."

Brick-and-Click Angles

Looking at the bigger picture, analysts say that many online-only companies are attractive buys for brick-and-mortar firms in the same line of business.

For example, Alex Motola, manager of the Thornburg Core Growth Fund, said that online advertising companies such as DoubleClick (Nasdaq: DCLK) would be attractive to a traditional ad firm -- like Omnicom, for example -- that wants to broaden its range.

By the same token, Motola said, Homestore.com might be a good candidate for a conglomerate like Cendant (NYSE: CD).

Motola also said he could envision pure-play postage company Stamps.com (Nasdaq: STMP) being purchased by its real-world rival, Pitney Bowes (NYSE: PBI). The two have been embroiled in patent litigation, which would be settled in the event of a merger.

Prices Low Enough?

"The big thing hanging over (Stamps.com) stock is the litigation, which is basically being brought by Pitney Bowes," he told the E-Commerce Times.

Indeed, the recent drop in stock prices has "given new or more palatable valuations" to many technology companies, said Motola, who expects merger activity to pick up.

"A lot of the market leaders in technology have fairly substantial balance sheets," he said.

Mindshare by Merger

Overall, even in the absence of outright mergers, analysts said that they still expect to see more brick-and-click alliances like those Amazon.com (Nasdaq: AMZN) has with Toys 'R' Us (NYSE: TOY), Target (NYSE: TGT) and other traditional retailers.

"That certainly is a trend that will continue," said analyst Paul Ritter of The Yankee Group.

"One of the ways that a smaller online company can get the mindshare to become a much bigger company overall is by aligning with a brick-and-mortar presence," either by alliances like Amazon's or by outright merger, Ritter said.

Online grocer Peapod, for example, was bought by Dutch supermarket chain Royal Ahold, parent of the Giant and Stop 'n' Shop chains in the United States. Both Giant and Stop 'n' Shop have brand-name recognition and distribution infrastructures in various regions of the country that they can leverage to get consumers to shop for groceries online, Ritter said.