Web Bubble Unwound – Acquisitions Turn into IPOs and Startups

In a bull market, acquisition is the name of the game. Companies find themselves with cash on hand and strong sales – so the natural next step is to invest some of those profits into buying up competition and other smaller businesses that are related to the industry. So when times are good, they’re really good… but when the market slows down, even small changes to revenue can lead to big losses in the company’s total holdings.

Internet startups are particularly prone to acquisition & investment based on hype, and many of these deals use wild valuations based on imaginary potentials rather than actual profitability. In the age of Digg, Myspace, and Facebook – the “conventional wisdom” has been to ignore the relationship between a website’s actual costs and revenue in favor of pageviews, media mentions, and buzz. Sure, there is a value in that – its just not realistically measured in the billions.

Time Warner Letting Go of AOL

One of the most celebrated acquisitions of the bubble years was Time Warner’s big ticket purchase of AOL.  Immediately following the merger, analysts and business pundits talked about corporate valuations near $300 billion.

Of course, it wasn’t long until that phase of the bubble popped and the value of dial-up ISPs crashed & burned.  Various attempts to rebrand AOL as a content producer have largely failed and even pointed out the redundancy of trying to build up new content businesses at the same time the company was being forced to sell off more established ones.

So after a few years of dropping hints and exploring what the market might look like, Time is finally getting ready to sell off AOL and realize the full extent of their losses.  Details aren’t finalized, but a spin out would probably result in Time shareholders also becoming shareholders in a newly independent AOL.

Ebay

Ebay has gone from internet super-star to struggling to keep up.  What was once an innovative online marketplace is now struggling to remain relevant as a multitude of internet trends threaten their niche in the economy.  The now higher listing fees don’t deliver the pageviews seller’s could get in the past, and if you’re going to have to promote your own items there are plenty of ways to cut out Ebay as the middle-man.

Ebay killer?

Aroxo has a plan to let sellers compete directly for sales based on the prices that prospective buyers are hoping to pay.  While it may not be the place to clean out unique junk sitting in your attic, it lets the seller know immediately whether or not their product is in demand.  And the fees?  Practically nothing, and they’re only charged when you make a sale.

StumbleUpon

So it is – when profits suck, its time to start selling off overvalued acquisitions.  Of course, now I’m talking about StumbleUpon – a popular social sharing site that Ebay once payed $79 million for.  Unfortunately, now that Ebay wants to sell it off, they’re ending up short with a $29 million valuation.

Skype

Skype is also headed to the auction block some time in 2010, but the exact timing will be determined by “Market conditions.” Ebay originally paid $2.6 billion for the online phone service, but they’re currently account for it at a $1.7 billion valuation.  I imagine the market conditions they’re hoping for include a lot of inflation.

Amazon

Amazon’s core business has been very successful, but its hard to say the same about the company’s investments.  In fact, they’ve lost more than 60% of equity investments just over the last month.  Then again, maybe they’re not really losing money on this, maybe they’re just selling off what they can to companies like Ebay.

Don’t Count on a Buy Out

Now is definitely not a good time to start up a business idea whose final step to completion involves selling your money pit to a rich web conglomerate.  I can’t believe I even have to say that, but then I remember the ’90s and early ’00s and realize that this has got to be breaking, shocking news to a lot of people still wearing rose-colored glasses.  Then again, I didn’t think that was a very sound plan back then either!

Acquisitions may still be in the cards, but the volume will shrink and valuations are likely to actually consider profitability.  IPOs have been slow so far this downturn, but a wave of spinoffs necessitated by cash & credit shortages should keep investors busy with the little bit of capital that they have left.

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