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Merger mania strikes the Net

A push for market share and stock market scares are driving the merger craze, as all manner of online firms join forces.

3 min read
Merger mania in the Internet industry is heating up again, underscored by two deals announced today.

In the latest examples, Web measurement firms Media Metrix and RelevantKnowledge said today they will combine, and Yahoo announced it intends to acquire direct marketing firm Yoyodyne Entertainment to expand its merchant services division.

Driven by the desire for market share, Internet companies have made October a busy month for mergers, which some analysts say is the sign of a maturing industry--and the result of the slumping stock market. Industry analysts say the positive effects of combined promotional efforts and shared financial risk are likely lead to more mergers in 1999, when traditional retailers are expected to open shop online like never before.

"It really makes more sense to merge as opposed to battling each other," said Barry Parr, director for e-commerce research at International Data Corporation.

Last week's Internet World conference was abuzz with merger mania after several deals were announced.

Portal Lycos said it will buy Wired Digital for $83 million. German publishing titan Bertelsmann AG took a 50 percent stake in Internet bookseller Barnesandnoble.com, and Penton Media bought Internet media company Mecklermedia for $274 million.

Meanwhile, online music companies CDnow and N2K have confirmed they are discussing a deal.

Second-tier Internet companies, in an effort to cut into the grip of market leaders such as Yahoo, America Online, and Amazon.com, are merging to gain market share in a hurry.

With the most significant strategic partnerships already locked down, the fastest way to a bigger market share is to combine efforts. Still, different companies merge for different reasons.

The Internet industry was clamoring for a standard measurement method, which likely influenced the Media Metrix-RelevantKnowledge merger, analysts said.

Others say the stock market's downturn has affected the merger outlook for some companies. Barnesandnoble.com had planned an IPO before Bertelsmann entered into a joint venture with the company.

"I think to a certain extent these mergers are reflective of a volatile stock market," said Melissa Bane, program manager at the Yankee Group. "I don't blame [Barnesandnoble.com] for taking the money rather than going out on their own."

Overall, analysts said they expect more mergers as the industry matures and as traditional brick-and-mortar firms make their way online.

"Traditional media companies?have been setting their sights to the Web for some time now. The Barnesandnoble.com acquisition was simply the latest iteration in a niche that could potentially have been threatened by Amazon's growing popularity," said Ron Rappaport, an Internet industry analyst at Zona Research.

"I wouldn't be surprised if CDnow and N2K are one day on the other end of the bargaining table, as they have impressive mind share and could represent the Barnesandnoble.com to a traditional 'real world' music store, akin to Bertelsmann," he added.

Meanwhile, companies are beginning to combine their expertise to make a more useful product.

Andromedia and LikeMinds announced a merger last week to combine their Web tracking and personalization software to make serving relevant ads easier for e-commerce sites.

"We do not expect these to be the last of the mergers in this arena, as the concept of one-to-one marketing slowly shifts from a utopian marketing vision to a market reality," Rappaport said.

Mergers with larger companies, especially those with deep pockets, give smaller Net firms more capital to spend on promotions and advertising.

"Your marketing prowess is going to be very important. 1999 is going to be the year of the traditional retailer," Bane said. "Next year, the traditional retailer is really going to get the Web and come out in full force at these guys."

Bane said many smaller Internet firms and brick-and-mortar companies have an online presence but don't know how to take it to the next level. "If you don't know, you need to be partnering with someone who does," she added.