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Rollup: The Next Wave for Net Stocks?

Some of the greatest fortunes of all-time have been the result of rollups. "Commodore" Cornelius Vanderbilt consolidated the railroads; Andrew Carnegie consolidated steel; and of course, John D. Rockefeller became the first billionaire as a result of the consolidation of the oil industry.

And, yes, many modern-day moguls have become superrich from consolidation. A prime example is Wayne Huizenga. Through consolidation, he built Waste Management and Blockbuster Video. At Waste Management, he bought one hundred companies during a nine-month period. He said it often meant eating breakfast, lunch and dinner at three different cities on the same day.

Consolidation requires tremendous dealmaking skills. It also means having a vision; that is, to see value when others do not.

So with valuations for Internet companies at nuclear-winter levels, isn't it time for consolidation? Well, there are actually signs of this already. A recent deal is pcOrder.com . For the past nine months, revenues were about $44.1 million, which was up from $29.6 million in the same period a year ago. Losses were $4.8 million.

Its parent company, Trilogy, thought that pcOrder.com was simply too cheap and made a tender offer for $6.375 per share - all cash. The final purchase price was $39.5 million. On the news, pcOrder.com surged 78 percent.

Although, it was not difficult to get approval for the deal. You see, Trilogy already owned 62.5 percent of the outstanding common stock of pcOrder.com. Further, pcOrder.com had cash of $69 million and short-term investments of $8.8 million.

So are there similar opportunities? One could be drugstore.com . As the name implies, this is the leading online pharmacy. In the past quarter, sales were $26.5 million, which was an 118% increase from the same period last year. The site added about 190,000 new customers and average revenue per customer rose from $43 to $49. But of course drugstore.com had hefty losses: $33.3 million. Although, the company has initiated plans to reduce operating expenses by $50 million over the next year, resulting in about a 10% reduction in the workforce.

Interestingly enough, Amazon.com owns about 23 percent of the common stock and Kleiner Perkins owns about 32 percent. Thus, if Amazon.com wanted to purchase drugstore.com, it would not be difficult to get approval.

Currently, the market cap is $141.5 million and the company has $147 million in the bank. In fact, during August, Amazon.com purchased 607,594 shares and Howard Schultz (founder of Starbucks) purchased 405,063 shares (both were for $4.94 per share).

Where Are the Promising Sectors?

Another recent Internet M&A deal was the purchase of Fogdog Sports , which was a down-and-out sports online retailer. Last quarter, the company had sales of $5.9 million, which was up 290% from the same period last year. Losses were $8.5 million.

But a competitor, Global Sports , saw opportunity and made a bid for the company, a combination of cash and stock. Fogdog had about $42.5 million in the bank and the purchase price stands at about $37 million. While FogDog's stock did pop on the announcement, the stock has since fallen back.

In other words, consolidation plays can be tricky. If you get a quick gain - take your profits fast.

What are some sectors that are ripe for consolidation? Let s take a look:

Content: Content was king; now, it is tantamount to a lowly peasant. Yet, the Web would be a lousy place without content.

Perhaps I'm biased, but I think there is quite a lot of value from financial content. One of the leaders is theStreet.com