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Distressed Dot-Com Sales Dropped Off in 2001

By @NY Staff

Acquirers spent $40 billion to snap up the assets of nearly 1,300 Internet and dot-com companies in 2001, half of which were infrastructure plays, said deal tracking firm Webmergers.

But despite a flurry of going-out-of-business sales throughout the year, a "perfect storm" of factors conspired against dealmaking that saw at least 40 canceled deals and 230 bankruptcy or other distress sales, the company said in its year-end report on mergers and acquisition activity for Internet-focused companies.

The San Francisco-based Webmergers, a hub for buyers and sellers of technology properties, said Internet infrastructure plays accounted for half of the $39.7 billion that buyers spent to acquire 1,289 Internet companies in 2001.

Acquirers increasingly turned their attention to Internet infrastructure during the year, spending $19.9 billion to acquire 575 companies that provide such infrastructure as e-business software, network "plumbing," tools and other enabling technology, Webmergers said.

That worked out to about 50 percent of the spending and 45 percent of the 1,289 deals for the year. In the fourth quarter alone, 65 percent of the spending went to infrastructure-related companies.

In addition, Internet infrastructure companies and destinations (sites) together accounted for more than 80 percent of total spending, or $25.5 billion in the year; throughout the year, the number of infrastructure deals increased steadily as a percent of the total.

Broken out by quarter, buyers spent:

*$11.8 billion on 350 deals during the first quarter
*$13.7 billion on 324 deals in the second quarter
*$7.1 billion on 306 deals in the third quarter, and
*$7.1 billion on 309 deals in the final quarter of 2001.

Although M&A activity for infrastructure-focused Internet companies increased , dealmaking tailed off toward the end of the year as investors soured on content and e-commerce sites, the firm said.

Of the $39.7 billion spent on deals during the year, Internet destinations (web sites, ASPs, marketplaces etc) accounted for 523 deals and about $13.5 billion in spending. "Destinations deals tended to be very small, reflecting the eviscerated valuations of the sector."

Internet-related professional services and consulting firms tallied 132 deals for about 10 percent of spending and 59 acquisitions of access providers accounted for another 6 percent of the total.

If there were any doubters about the size and scope of the oft-repeated dot-com shakeout, the data underscored a different kind of pain in a year that saw fewer buyers stepping up for firesale prices. Webmergers said total spending for all four major Internet sectors (infrastructure, destinations, consulting firms and access providers) amounted to less than half the nearly $90 billion spent by acquirers in 2000 in just one sector alone, destinations.

Webmergers said some of the factors in the "perfect storm" that dampened M&A activity, included:

  • stock volatility in a "recession-ridden and terror-struck" year.

  • Internal Housecleaning: Many were simply too absorbed with internal economic issues to pay attention to M&A opportunities.

  • The Internet Panic: The widely publicized Internet shakeout caused many decision makers to panic and write off the entire dot com sector.

  • Fence-Sitting: With little competition for deals and with target properties getting less expensive by the day as their cash dwindled, buyers had more time to shop around. Due diligence became much more exacting.

    Such factors helped contribute to a "spate of aborted deals, painful fire sales and, of course, highly compressed valuations."

    More than 230 asset sales accounted about $3.3 billion in spending, or about eight percent of the year's total.

    But 2001 did end on hopeful note, the firm said, with signs of market stabilization, a rare competitive bid and stirrings of activity among such potential buyers as Yahoo!, eBay, USA Interactive and Cisco.

    The surprise $435 million offer by Yahoo! for online recruiter HotJobs, Inc., which trumped a prior stock offer by TMP Worldwide, helped provide some of the positive signs as the year closed, Webmergers said.

    Some of the record-setting deals of the year included Cendant's $2.9 billion acquisition of travel services provider Galileo International and Vivendi Universal's $373 million bid for online music property MP3.com.