Report: E-tail Firms To Miss Buyout Boom

While 2001 is expected to build upon "one of the hottest years ever" for tech mergers and acquisitions (M&A), a report released Wednesday by PricewaterhouseCoopers indicates that potential buyers for technology companies will likely shy away from business-to-consumer (B2C) dot-coms.

Instead, according to the report, selective investors will be doing their shopping in the networking, broadband, wireless optical, and semiconductor sectors.

"Acquirers are going to be a lot choosier about the deals they make, given the changes in the equity markets, combined with general uncertainty about economic conditions," said Steve Meisel, partner in PricewaterhouseCoopers' Transaction Services group.

Meisel added, "That doesn't mean that the boom in tech M&A is going away any time soon. However, it does mean that only deals that promise to help CEOs seize new market share and technologies will get done."

No to B2C

New York City-based PricewaterhouseCoopers said investment bankers have all but stopped shopping for e-tailers, as their market values and market shares continue to slide.

Venture capital firms that once rushed to invest in dot-coms are exercising more caution now because of the weaker economy and volatile securities and credit markets. As they tighten their purse strings, a "significant pool of funds remains uninvested," the report said, and startups that were once able to get capital on the basis of a good idea are now having to wait until they have established a track record.

Meisel told the E-Commerce Times that the coming year could see a further consolidation in the B2C arena, with e-tailers being acquired by brick-and-mortar retailers that want to expand their online offerings.

E-tailers hoping to be acquired, according to Meisel, need to demonstrate strong stock margins and be able to show that they are on the "path to profitability."

Buying B2B

Despite the gloomy outlook overall for e-tailers, Meisel believes 2001 will still see some M&A action among business-to-business (B2B) companies, where interest remains high. According to PricewaterhouseCoopers, the interest in B2Bs stems from companies looking to acquire technologies that "keep them close to their existing companies, while opening up parallel markets to exploit growth opportunities."

All evidence points to B2B domination of e-commerce in the coming years. A report released last month by Webmergers, a San Francisco, California-based M&A tracking company, found that of the 131 dot-coms that folded between January 1st and the second week of November, 99 catered primarily to consumers and only 26 were B2Bs. The remaining six served a general business and consumer audience.

A report by released earlier this month by eMarketer found that the B2B sector currently accounts for 79.2 percent of total e-commerce spending, but will command 87 percent of the total by 2004, when worldwide B2B spending will reach US$2.776 trillion in revenue. eMarketer predicts total e-commerce revenue will reach $4 trillion by 2004.

Along with buying B2B dot-coms to acquire new technologies, PricewaterhouseCoopers predicts that acquirers will also be targeting companies in markets with extremely low unemployment -- like Austin, Texas; Boston, Massachusetts; Northern Virginia; North Carolina's Research Triangle; and California's Silicon Valley -- to gain access to high-tech employees.

"This is not going to be a big-spender's market, with deals getting done simply because there is capital to do them," said Meisel. "The deals that get done will be those that have strong potential to shorten time-to-market and increase market share. If they don't increase cash flow and earnings -- or have the potential to do so in the near term -- they're going to be a lot harder to justify."

The Year That Was

Among the most high-profile of high-tech marriages this year was the $111 billion merger of America Online and Time Warner. Originally proposed in January and approved by stockholders this summer, the deal was given the green light by the U.S. Federal Trade Commission (FTC) earlier this month.

Also merging this year were online supermarkets HomeGrocer.com and Webvan. Webvan purchased HomeGrocer.com in June for $1.2 billion. However, the merger has not been without problems as HomeGrocer.com has slashed roughly 150 jobs since the acquisition was announced and Webvan reported a wider-than-expected loss for the third quarter due in part to the takeover.

Another dot-com tale missing a happy ending is the acquisition of Petstore.com by rival Pets.com. When the deal was announced in June, it looked as if Pets.com was on the trail to becoming the Web's leading pet e-tailer. However, in November Pets.com announced it was shuttering its virtual doors after a "lengthy and exhaustive" effort to raise capital failed.