Burnham's Beat

2008 Internet Stocks: Year In Review Plus 10 Best and 10 Worst Stocks

Internet stocks outperformed the market in 2008, albeit in the wrong direction.  Overall, the internet sector declined -52.2% during 2008 vs. the NASDAQ's -40.5% decline and the S&P 500's -38.5% decline.

Out of 128 year-end stocks in the sector, the average stock declined by -52.3% and the median stock declined by -56.2% indicating that declines were pretty well balanced across small and large cap Internet stocks.

It's interesting to note that Google, which accounts for a whopping 41% of the sector's capitalization was down 56%, slightly more than average, which means that Google actually underperformed the Internet sector as a whole.

Believe it or not, but only 4 Internet stocks or just 3% of the total managed to post a gain in 2008.  That means that 60% of the Top 10 performing Internet stocks of 2008 actually lost money.  See for yourself:

2008 Top 10 Best Performing Internet Stocks

About the only notable trend in the Top 10 was the strength of Chinese Internet stocks which is kind of surprising given that the main Chinese market was down 65% for the year.  Some of this may have to do with the fact that Chinese Internet firms already traded at very low relatively PE's prior to the crash but in general it's a bit confusing.

In terms of losers, as with our review of Software stocks, the competition to make the list of Top 10 losers was fierce and required an even bigger decline to make the list.

2008 Top 10 Worst Performing Internet Stocks

No real trends here either except to point out the that top two companies changed their names during the year as part of a rebranding/restructuring exercise.  Kowabunga indeed!

2008 Public Internet M&A: Year In Review

2008 will not be remembered as the "Year of the Deal" in the Internet sector.  In fact, it is a year virtually all companies and investment bankers would prefer to forget.

There were a grand total of 9 public Internet companies acquired in 2008 and the largest of those deals, CBS's acquisition of CNET, was only $1.8 BN, hardly big enough to generate sufficient fees to keep Wallsteet's finest attired in bespoke suits.

The biggest news in the Internet M&A space was, of course, the deal that never happened: MIcrosoft's proposed offer to buy Yahoo!.   In the wake of this failed engagement there may be some big deals in 2009 as both Microsoft and Yahoo pursue other options, but for now 2008 will go down as one of the quietest, perhaps the quietest, years for M&A in the Internet sector ever.

           2008 Acquisitions of Public Internet Companies

Closed	Target		Acquirer		$ Size
1/17/08	Visual Sciences	VSCN	Omniture	OMTR	$394
2/4/08	Traffix	TRFX	New Motion	NWMO	$159
3/18/08	Audible	ADBL	Amazon.com	AMZN	$300
4/16/08	Varsity Group	VSTY	Follett Group		$4
6/30/08	CNET	CNET	CBS	CBS	$1,800
8/6/08	Hostopia	H.TO	Deluxe	DLX	$124
10/15/08	Greenfields Online	SRVY	Microsoft	MSFT	$486
10/30/08	Napster	NAPS	Best Buy	BBY	$121

For a complete list of public Internet M&A deals as well as some private deals see this list of Internet M&A deals.

2008 Internet IPOs: Year in Review

This is going to be an easy review.  That's because 2008 will likely go down as the first year in the modern "web" era of the Internet that there wasn't a single Internet related IPO in the major US stock markets.  That's right, not a single one, zippo, nada.  There were a few spin-offs and a couple cross listings but as for brand new spanking public Internet companies there wasn't a single one.  It's enough to make a make a grown VC cry.

As it stands, the last IPO of an Internet focused company was arguably NetSuite, which went public on 12/20/08 at a price of $26/share and closed today at $8.44.  And that 68% price decline, ladies and gentlemen, is all you need to know on why there hasn't been an Internet IPO since then.

That makes it 377 days without an Internet IPO.  I modestly suggest that Sand Hill VCs should tie a ribbon made of $100 bills around a Redwood tree outside their offices until such time that the market stops holding their late stage deals hostage.

Granted there were only 30 IPOs in the entire market in 2008, but you'd think that what is supposedly one of the fastest growing, highest technology sectors in our economy would be able to contribute at least one good IPO.  Oh well, maybe next year.

Infospace and the Great Shareholder Robbery of 2007

Wow.  Infospace reported earnings today and the stock was off 14%.  But that's not what's making me say "wow".  What's making me say "wow" is that I took this opportunity to take a look at Infospace's 2007 "earnings" report and I have to say I am impressed because it has to go down as one of the great shareholder robberies of all time.  Infospace, as you may recall, was a once high flying internet content company that assembled a motley menagerie of web and mobile based content businesses via 30+ acquisitions over the last 10 years.  They bought everything from Authorize.Net, to Go2Net, to Switchboard.  While there was supposedly a grand strategy driving to all these purchases, arguably what they were left with after 10 years and $1.7BN in paid in capital was just over $1BN in retained losses and a motley collection of business that looked like they were going no where fast.

Anyway, the company's mobile business was held out as the potential savior for a long time but as that too began to implode in 2006 and early 2007 the management team basically threw in the towel and embarked on a process of selling off the company's assets piece meal to the highest bidder.  No doubt a somber occasion given that the sales represented the culmination of a failed strategy that had cost shareholder's a cool $1BN, but at least you have to give the management team and the board credit for doing the honorable thing by admitting they failed and doing their best to salvage something for the shareholders.  Or do you...

On Closer Inspection
Before you give the management team and board any credit for doing the right thing, you might want to know a little something about the a deal they struck for themselves that nicely coincided with their fire sale.  The plan was to sell off the assets and dividend out the cash proceeds to the company's long suffering shareholders, which sounds fair enough.  However, the management team was able to convince the board that they should get paid a "bonus" equivalent to the dollar value of the dividends that would theoretically accrue to any vested or unvested stock options they might have.   So if the company did a $5 dividend of sale proceeds and the stock dropped $5 (which it inevitably would), the management team would get a $5/share bonus for each vested and unvested stock option they owned.

Now on one level that sounds fair enough.  I mean after all, why should the management team and the employees have their options go further underwater simply because they are doing the right thing and trying to get shareholders back some cash.  However the net effect of such a scheme is to basically give the management team a gross cut of whatever they sell an asset for without regard to whether or not the sale was even profitable.   The cynic/economist/anyone with common sense would say that under such a incentive structure management would race out and sell everything and the kitchen sink for whatever price they could get because it was money in their pocket no matter what.

Care to guess what happened?

Everything Must Go!
That's right, Infospace's management team ran out and sold everything they could for whatever price they could get.  The directory business, painstakingly built up over a period of 10 years: sold for $225M to a private equity firm.  The mobile business, which they been acquiring new businesses for less than a year earlier: sold for $135M to a private competitor (who reportedly now mightily regrets the purchase).

And what did they do with all that cash (as well some cash from settling a lawsuit with a former founder who defrauded the company's investors)? Why surprise, surprise, they dividended out all that cash out to their shareholders in two special dividends totaling $15.30/share or over $500M in cold hard cash.

And what, pray tell, what did the management team get for the arduous task of lifting up the phone and calling their bankers?  A cool $90M in special cash bonuses and stock compensation in 2007.  If you are on that management team, the thought that likely came to mind as you cashed your 2007 bonus check was "God Bless America!"

Defending the Indefensible
But wait, defenders of the management team's "golden dividend" might point out that the asset sales generated a combined $149M "gain" and surely the team should at least be entitled to share some of that gain.  But that logic fails to account for that fact that prior to 2007, Infospace had already taken $240M in impairment charges since 2000 which means that the actual "gain" on sale of those assets was likely far lower and might even have been a net loss of over $90M on an original cost basis. (I'd guarantee its a loss, but it's impossible to figure out what impaired assets were sold given how many deals they did.)

One final point of defense might be the stock price.  Defenders might point out that at the beginning of 2007, before management embarked on the asset sale strategy, Infospace's stock price was $20.51, and even though it closed at $10.38 today, when you add back the $15.30 in dividends, you get an adjusted price of $25.68 or about $5.17 higher, so one could argue that despite all the management payouts they still created value.  There are only two problems with that logic:  1.  With 33 million shares outstanding, $5.17/share translates into only $170M in increased "shareholder value" vs. $90M in management comp which equates to a 35% cut for the management team.  M&A bankers would sell their mothers to get a 3% cut of a sale so I shudder think what they'd do for a 35% cut.  2.  If you go back just 3 years, the stock price was at a whopping $47.55 meaning that shareholders have suffered a 46% loss in the last 3 years, but the management team and the board thinks that's an occasion for them to give themselves a windfall payday the size of which would make even an investment banker blush.

Don't Look Now But You've Been Robbed
Let me be clear: I've never owned or shorted (unfortunately) Infospace stock, so I don't really have a dog in this fight.  I am just flabbergasted that none of their shareholders stood up to such a blatant scheme and called it for what it is: highway robbery.  I don't have a problem at all with paying management teams well for creating value,  I just have a huge problem with handing out huge bonuses (i.e. more than 10X the already egregious fees charged by bankers) to people who sell assets for little if any gain when their shareholders are already sitting on $1BN an losses and a 46% stock depreciation since 2005.  Call me crazy, but I have a problem with that even if, inexplicably, Infospace's shareholders don't.  You may also ask why didn't the board, who supposedly represents the shareholders, have problem with that: simple, they cut the same deal for themselves.

As for shareholders, they are now left with a business whose only significant asset is a website called Dog Pile.  If you're like me, the image that pops into your mind when you hear the term "Dog Pile" isn't exactly a pile of money, which at least strikes me as poetic justice if nothing else.

I currently have no investment position, long or short, in Infospace.  This is not investment advice, it is an incredulous rant.  Please see my disclaimer at the bottom of this page for further details.

Wigix: An Idea Whose Time Has Finally Come

Wigix is launching its public beta today and the world of online auctions, indeed the world of "stuff" in general may never be the same.  As an early investor in Wigix and an avid fan of its team and concept I want to congratulate the Wigix team on all the hard work that has gotten them to this point!

What exactly is Wigix?  Wigix is, at its heart, an ambitious attempt to bring online auctions into the 21st century by applying modern market technology to everyday items.  In essence, Wigix creates a stock market for your stuff.  Into this stock market Wigix then weaves a deep sense of community and persistence which then enables people to track, discuss, and share information about their stuff. 

The ultimate, rather immodest, goal of Wigix is to create a complete record of every item in existence, who owns it and what it's worth, as well as a platform that enables people to track, discuss, and trade all of those items.

Ever wonder how much your stuff was currently worth?  Or what other people paid for their original iPod?  Or what owners of the PS3 think is its worst feature?  Or what interesting things your friends just purchased and why?  Wigix is a platform that can provide answers to all these questions as well as an online auction experience that is light years ahead of what's available on the Internet today.

Despite just entering its beta launch, Wigix is already an incredibly rich site with a huge amount to see and do.  It’s still a beta though, so there a few features left to add and a lot of content still to come.  I could go on and on about Wigix and why I believe it’s one of the most interesting web platforms that has launched in a long time, but you’d be better served by just jumping over to the site and taking a look around for yourself.

Top 10 Things to See and Do On Wigix
Before you go though, let me give you my list of the Top 10 things to see and do on Wigix as a way to highlight some of the most interesting aspects of the site:

1. SKUs: Wigix does not have listings, but rather SKUs.  SKUs are kind of like a pre-built listing or a stock ticker for a specific item.  Users simply indicate which SKUs they own by placing these SKUs into their portfolio.  Once in their portfolio, a user can track the value of that SKU and then decide to sell it at any time in the future.  Once you see a SKU and compare it to a listing at a traditional online auction site, you will never want to go back.  For example, check out the SKU for the iPhone and look at the all the rich detail and information that is available.
2. Catalog Browsing:  At the heart of Wigix is a catalog of SKUs, roughly 462,000 and growing.  These SKUs are necessary to enable trading, but they also create what is in effect a huge catalog of stuff.  Try browsing through the catalog. It is a very cool and visually appealing experience thanks to some nifty programming by the team.  I think Wigix’s browsing and search features have set a new standard for product catalogs on the web.
3. Persistent Portfolios: Wigix does not charge listing fees but rather encourages all users, not just buyers and sellers, to build and maintain portfolios of their stuff, similar to stock portfolios. These "stuff portfolios" persist over time allowing users to not only track market prices for their stuff but to track the stuff accumulated by friends, family, and fellow collectors.  Try it out by registering and adding a few things you either own or want to own to your own portfolio and you’ll immediately how easy it is.  Here is my public portfolio of stuff (you need to register to view it), feel free to make a bid if you see something you like!
4. “Ask the Owners”:  Ever have a very specific question about a potential purchase but have been unable to find the answer on the product’s website or in product reviews?  Because Wigix keeps track of who owns what, it’s possible for any user to ask the owners of a particular product a specific question.  If they want to, the owners can then respond with an answer.  I did this when I wanted to know what Wii game I should I buy for my nephew.  Check out the responses on the Wii SKU page under the “Ask the Owners” tab.  Very cool.
5. Bid/Ask Trading: While the NASDAQ uses a bid/ask trade system to trade stocks, Wigix uses a bid/ask trade system to trade stuff.  In comparison, EBay uses what are called "English Auctions".  Wigix's bid/ask system enables instant trading, continuous historical data, and is not subject to "shilling" or "sniping", two problems that are endemic to EBay.   It’s interesting to note, that many stocks and bonds were also once traded using English Auctions, but once bid/ask-based exchanges opened, the purveyors of these English Auctions quickly disappeared.
6. Community : Wigix has woven community and social networking technologies directly into the main features of the site.  This makes it possible for people to keep track of what friends, family, and fellow collectors own or want to own.  It also makes it possible to interact with the owners of a particular item and join groups of like minded individuals.  If you register, make sure to add me as a friend (my user name is “Bill”) to get a sense of the community features.
7. SKU Owners:  In the same spirit as Wikipedia, Wigix’s catalog of SKUs can be expanded and enhanced by any user.  Wigix rewards SKU contributors with a small share of the revenues generated by that SKU.  Try adding your car or cell phone (if they aren’t already in the catalog).
8. Category Experts:  Manging all of the SKUs in a particular category is the responsibility of category experts.  Who are the category experts?  Pretty much anyone who has the passion and inclination to apply.  Like a guide at About.com, Category experts get a small revenue share of all the revenues generated by the SKUs in their category.  From a technical perspective, what’s cool about both SKU ownership and the category experts is that to enable those features Wigix has had to create to what amounts to a massively distributed database that can support thousands of what are, in effect, DBAs.  I am the current Category Expert for Audis, Digital Media Players and NAS Drives.  If you are really passionate about a particular category of stuff, apply to be an expert.  It’s not much work and it’s a lot of fun being master of your own little corner of the database.
9. SKU Trading: Once you add a SKU to the catalog and your submission is approved by the appropriate category expert, you own the SKU and not only are entitled to a share of the revenue it produces, but you can actually trade ownership of the SKU, in the same way that you can buy and sell a domain name.  Now the value of a SKU is very speculative at this point because they won’t have any value until they start generating revenues, but in the meantime it is fun to speculate and trade them.  In fact I picked up the Blackberry 8700c for $1 this morning although someone just bid $30 for the iPhone SKU (I had bid $1), so it looks like I won’t be getting that one…
10. Facebook Apps:  Yes like any good start-up these days, Wigix has its own Facebook apps.  My favorite is the MyWigix application which allows me to display my portfolio of stuff on my Facebook profile and automatically creates new Facebook feed items when I get new stuff.

Anyway, as I said before, I could go on and on (and to some extent already have), so to keep this post managable I will end things here. I think I’ll write another post in the future that points out from a business model and technology perspective how Wigix differs from today’s King of online auctions, EBay, but today I just want to congratulate the Wigix team for reaching this milestone.

SkyGrid and the Emergence of Flow-Based Search

GigaOm had a post today on a company called SkyGrid and its official company launch.  As an investor, advisor, and beta-user of the platform, I thought I would chime in with my own self-serving post mostly because I wanted to talk about the advanced technology and architecture behind SkyGrid and why it makes the company such an interesting case study in the evolution of search technology.

Simply put, SkyGrid represents a massive and exciting departure from traditional search architectures and technologies.  If I had to sum it up in a word, I would say that SkyGrid represents what I consider to be one of the first "flow based" search architectures, while traditional search engines are "crawl based" architectures.

Old Search: Crawl/Index/Query
While the technical departure was necessitated by the leading edge demands of investment professionals, it was these needs, and the lack of traditional search's ability to meet them, that exposed some of the most glaring weaknesses of traditional search technology. Specially, traditional search technology and architectures suffer from several glaring weaknesses:

1. Crawl-based: Current search architectures collect information to index primarily by employing massive farms of "crawlers" that systematically crawl IP address spaces. The benefit of crawling is that it is exhaustive, the drawback is that it time consuming and expensive.
2. One-off: Search platforms are designed around rapidly processing one off queries. This makes search engines highly useful and adept at finding "the needle in the haystack" but very cumbersome to use in situations where one just wants to get new results to the same old query.
   
3. Batch-based: Page rank and the other "secret sauce"algorithms behind most search engines today require a very expensive and complicated indexing process to be performed on "snap shots" of data. It can be days or even weeks before newly published content is crawled and properly indexed, meaning that most search engines fail to provide "real time" results for all but the most popular content sources (which they crawl very frequently).
   
4. Unabridged: Search engines are exhaustive in that they return every URL that mentions a string. This is good is you are looking for a needle in the haystack, but bad if you are trying to search on a common term such as "Google" or "Microsoft". While ranking algorithms do a great job of ordering results according to likely relevancy, they don't filter down the number of results. Since most users don't go past the first page of results, this makes it quite easy to miss relevant information that for some reason doesn't rank in the top 10 results.
   
5. Unstructured: Search engines typically present query results as a simple list without context or analytics, beyond say separating them by a simple criteria, such as text and images. While some progress has been made in terms of trying to cluster results or help users filter them, by and large, users still just get an unprocessed, unanalyzed data dump when they do a search.
   
6. Retrospective: Search today is focused on determining what has happened in the past. Who wrote what, who said what, etc. However this does little to help people figure out what will happen in the future.
   

Without giving away the farm, SkyGrid represents an exciting departure from the search technologies and architectures of the past. This change has been made possible by several factors including the widespread deployment and adoption of ping servers and RSS/ATOM feeds, dramatic improvement in several areas of artificial intelligence and unstructured data analytics, and new stream-based methods of database and query design.

SkyGrid Search: Flow/Filter/Analyze
When you put all of these technologies together, along with a laser like focus on solving some of the unique high-end demands of investment professionals, you get a radical new search architecture and technology that not only solves some very pressing and pragmatic problems facing investors, but holds the potential to actually predict the pattern and influence of idea/meme propagation throughout the internet and from there into the financial markets and beyond.  

Specifically, SkyGrid's search architecture differs from traditional search engines in that it is:

1. Flow-based: SkyGrid treats the web as a giant pub-sub system or at least it does to the extent that the rapidly growing RSS/Ping server infrastructure does. It does not crawl the web, but rather the web "flows" to it.
2. Persistent:  SkyGrid persists queries over time so that incremental results are delivered with no additional action by the user. One can easily see how this would be valuable in the case of something like, oh say, a stock, which persists from day to day.
   
3. Real-time: Rather than using batch-based indexing, SkyGrid uses a real-time stream-like query system that queries (and analyzes) new content as it flows into the system. This is particularly useful in situations, such as investing, where a few minutes or seconds, can make a huge economic difference.
   
4. Filtered: Rather than presenting results as a data-dump, SkyGrid uses advanced analytics in the form of entity extraction, meta-data analytics, and rules based AI, to quickly analyze and append additional meta-data to incoming information. This enables users to easily filter data according to number of criteria which greatly lessens the chance of "data overload" and greatly improves the chance of "data discovery".
   
5. Analytical: By applying highly advanced artificial intelligence, such as natural language procession, entity extraction, etc. SkyGrid is able to actually analyze and assess the actual content of a URL, thus enabling it to make determinations such as the sentiment (positive/negative) of information, its "velocity" and its "authority". This goes a step beyond simple meta-data filtering to creating real insights into the content.
   
6. Predictive: SkyGrid's flow based architecture and advanced analytics enable it to view the web as a living breathing, changing entity. By observing the propagation of information over time and across downstream nodes, SkyGrid is in a position to not only assess the "authority" and "influence" of individual nodes, but it should ultimately be able to make reasonable predictions about which information will flow where on the web. By correlating this observed "flow" over time with observed movements in things such as, oh say, stock markets, company sales, etc. it can not only assess the historical sensitivity of changes on the web creating changes in the real world, but it should ultimately be able to theoretically predict, with reasonable accuracy, many of those changes. Yes, I said it: SkyGrid and its new search architecture may ultimately predict the future.

I realize that the last point is at the very least hyperbolic and at worst disingenuous, but as an early beta-user I can tell you first hand that once you see it in action and understand the architecture, predicting the future, in some very specific, limited, yet potentially highly valuable ways, is certainly not something beyond the realm of reason and indeed something that seems quite possible given the progress to date. That said, SkyGrid is still a beta platform and many features have yet to be implemented in part or in full, but the promise and potential is undeniably there.

Google Roadkill?
Why won't SkyGrid simply be put of business by the big players like so many other search oriented start-ups? First and foremost because SkyGrid is delivering a premium product to a group of users that will pay significant sums for something that not only dramatically improves their daily productivity but holds out the promise of providing insightful, market oriented analytics that they simply can't get elsewhere. Second, the existing search engines cannot compete effectively against SkyGrid because to do so would require a reengineering of their basic search architectures to address all of their shortcomings relative to SkyGrid. Moving from a traditional crawl/index/query architecture to a flow/filter/analyze one is a decidedly non-trivial undertaking, one that would require an entire re-architecture of their core services and thus one highly unlikely to be made.  

Well then does that mean that SkyGrid will put the "legacy" search engines out of business? Not at all. The current search engines are optimized to deal incredibly well with the vast majority of queries from the vast majority of users and they will likely continue to do so for some time. Next generation flow-based platforms such as SkyGrid are, by design, tackling a subset of the available queries, but arguably a very valuable subset. Indeed that's why SkyGrid can charge $500/seat/month for its services while the existing search engines must give away their services for fee and make their money on advertising.

Now I can see a lot of people being skeptical after reading this about both my ability to impartially judge SkyGrid's next generation search technology as well as its market potential. To them I would say: just keep your eyes out for some announcements over the next month as I think they will conclusively demonstrate that a number of people far more knowledgeable and accomplished than I see the same potential.

Microsoft/Yahoo: A Bad Deal For Silicon Valley: Take II

Marc Andreessen has posted a very thoughtful rebuttal to my argument (as well as Fred's and few others) that the Microsoft/Yahoo deal is a potentially a bad thing for Silicon Valley.  The funny thing is that I actually hadn't noticed the post yet in my feeds but it was brought to my attention by a number of people who were basically like "Oooo, you've been served!" and were wondering if I was going to challenge Marc to some kind of blog-off or something.

I hate to disappoint folks, but after reading Marc's post I actually agree with most of what he has to say, especially his overarching message to start-ups, which I took to be "Focus on building a great business and the exit will take of itself".  Marc also made a number of other good points around the M&A environment which if I could sum it up were basically "Hey, life will go on, other companies will try to take up the slack, it's not the end of the world."  In particular I think his point that a combined Microsoft/Yahoo may prompt some second tier firms to increase their M&A is a good one.  I also agree that over the long term, creating a big bureaucratic behemoth such as Microsoft/Yahoo is a good thing for start-ups because it means that start-ups will likely be able to dash ahead of the lumbering giant and secure fresh new areas of opportunity well before the folks at Microhoo file even their TPS reports and get out of their staff meetings.

That said, I still think that Microsoft's acquisition of Yahoo is still a net negative from an M&A perspective.  Yes, it's certainly not the end of the world, but on the whole and on the average it's never a positive thing to have an active, well endowed, acquirer removed from the mix.  Yahoo may not have been buying 50 start-ups a year, but they were still one of the most active Internet acquirers not just in terms of deals, but also in terms of bids.  Indeed the most important party in any deal is not the actual buyer but the second place bidder and Yahoo had seemed to make a career out of being the second place bidder lately.   Finally, thanks to its huge market capital, massive traffic and strong (although not relative to Google) monetization platform, Yahoo is one of the few Internet acquirers who have the luxury of being able to easily drop $50-$100M on a "feature" without really thinking about it.  I totally agree with Mark that if you are building a "feature" with the intent of getting acquired by Yahoo or whoever, you were likely doomed to failure a long time ago, but at same time, the cynic in me has seen a lot of "features" get funded in the valley over the past two years often under the assumption that if they get enough eyeballs one of the big three M&A fairies will swoop in and drop $100M just to "keep up with the Joneses".

So I agree that life will go on in the valley and there are some real positive non-M&A aspects of the deal for start-ups, but at the same time, I think net, net it's bad for the M&A environment.  That may change over time as new companies emerge to take up the slack, but over the next 24 months things could be a bit rough because not only will you have Microsoft and Yahoo thoroughly distracted,  but IAC is going to be a complete mess due its dispute with Liberty and AOL appears consumed with consummating its death spiral within Time Warner.  I am sure M&A bankers will do their best keep the deals flowing, but if you have an Internet start-up, given the turmoil within the big acquirers and the rapidly deteriorating economic environment, as Marc suggests, you should definitely just keep you head down on focus on building a real business.

Microsoft/Yahoo: A Bad Deal For Silicon Valley

There's a ton of discussion today about Microsoft's unsolicited bid for Yahoo.  Much of the discussion focuses on whether or not the deal is a good thing for Microsoft, Yahoo or Google's shareholders.  While it's possible it could be a good or bad deal for one, the other, or all three, one thing is for sure:  this a bad deal for Silicon Valley start-ups and their VCs.

How could that be?  Because by swallowing up Yahoo, Microsoft will be removing one of the biggest and most active acquirors of start-ups in Silicon Valley.  The intense competition between Microsoft, Google, and Yahoo has arguably been one of the main factors helping drive up M&A activity and prices for internet related start-ups.   It seems like every rumored acquisition over the past few years has had all three fighting in some way to win the deal.

Even though Yahoo has been wounded of late, it still had a market cap in the 10's of billions of dollars which allowed it to be a legitimate competitor for any deal under $1BN and in fact Yahoo has been a pretty active player in that market whether its del.icio.us, flickr, Rivals, etc.

If it's acquired by Microsoft, that will leave only two Internet media/search acquirors with the ability to easily do sub $1BN deals.  What's more, while Microsoft has recently show a willingness to deal really big deals such as Acquantive and now Yahoo, it has traditionally been less willing to smaller "tuck in" deals, deals that Yahoo has traditionally been much more active in.  Indeed, Microsoft has traditionally been dismissive of these deals because they just don't move the needle for them and their engineering staffs still retain a relatively high degree of NIH attitude.

Losing one of the Valley's most reliable "tuck in" acquirors and second place bidders is a net negative for the Valley.  It will make M&A less competitive in general and will reduce the # of potential exits for "me too" start ups" to 2 instead of three.  That's bad news for Internet content/search start-ups and their VC backers anyway you look at it.

Top 10 Internet Stocks of 2007

2007's list of top performing Internet stocks provides a little bit of  de ja vu from 2006's list.  As was the case in 2006, China remained a hot investment sector, although this year's China winners are different than last year's.  Three of last' year's Top 10 performers repeat in 2007, something to be truly admired in the rough and tumble Internet sector.

To qualify for this list the company had to start 2007 with a market cap of at least $50M and its business had to be focused on the Internet.

So, without further ado, here are the Top 10 Internet Stocks of 2007:

1. China Finance Online
   Price Change: 392% Ticker: JRJC
   Comment:  The Chinese stock market was "en fuego" all year and what better way to play that market than an Internet company that sells online financial services products and information.
2. Baidu.com
   Price Change: 246% Ticker:BIDU
   Comment:  China's #1 search engine appeared to be pulling away from the pack in 2007 despite desperate attempts by Yahoo and Google to get in the game.  Right now the market seems to think Baidu is going to win.
3. Tradus
   Price Change: 184% Ticker: TRAD.L
   Comment:  Formerly known as QXL and a serious competitor to EBAY in Eastern Europe, QXL's stock was supported by takeover rumors all year, which turned out to be true in December when South African media group Naspers announced a deal to acquire it.
4. Acquantive
   Price Change: 168% Ticker: AQNT
   Comment:  Aquantive was acquired by Microsoft in the middle of the year after they scrambled to respond to Google's acquisition of privately held Doubleclick.
5. Priceline
   Price Change: 163%% Ticker: PCLN
   Comment: Last year's #10 performer, Priceline is back again, a very impressive performance for what was thought to be a mature company.  Priceline continued to school the rest of the online travel field, especially with its expansion into Europe.
6. Omniture
   Price Change: 136% Ticker: OMTR
   Comment: Last year's #7 stock moves up one spot to #6.  After a successful IPO in 06, Ominture grew quickly in 07 and announced the acquisition of its main public competitor (VSCN).
7. Amazon.com
   Price Change: 135% Ticker: AMZN
   Comment: The granddaddy of online retailing flexed its growing muscles in 07.  Thanks to growing revenues and somewhat decreased tech spending margins expanded quickly and earnings accelerated.
8. SOHU.com
   Price Change: 127% Ticker: SOHU
   Comment: One of China's largest portals saw impressive growth and benefited for investor appetite for all things China.
9. Gigamedia
   Price Change: 92% Ticker: GIGM
   Comment:  Last year's #2 stock, holds on to a  Top 10 position.  Unlike  other gambling stocks, Gigamedia's focus on Asia as well as its casual games help it buck the trend and keep growing without regulatory interference.
10. BlueNile.com
    Price Change: 84% Ticker: NILE
    Comment: The Internet's largest jewelry retailer saw its stock take off in 2007 and it reached critical mass and began to drive impressive margins.
    

Google's Postini Buy Has Some Interesting Implications

It was announced today that Google has purchased Postini for $625M in cash.  Before I give a few thoughts on the deal I want to congratulate Ryan McIntyre who I used to work with at Mobius Venture Capital.  Ryan made the initial investment in Postini and staunchly supported the company.  He has a good post up on the acquisition that you can read here. 

In terms of the deal itself I think this deal has several implications:

1. Make no bones about it, Google is definitely going after Microsoft's Exchange franchise.  With the addition of Postini, if they just add push e-mail support and an off-line client, GMail will basically be as good, if not better than Exchange.  I haven't heard anything about an off-line client for GMail but as Zimbra has demonstrated, it's possible so I would expect to see something like this from GMail in the near future.  Speaking of Zimbra, IBM should buy Zimbra and kill off Notes.  Zimbra is the only chance it has of keeping up with MSFT and GOOG in the e-mail race at this point.
2. This is not good news for other anti-spam companies, especially if GOOG decides to offer Postini's basic anti-spam services for free.  The way Postini works (you simply redirect you MX traffic to go through their servers) reminds me of how Feedburner works.  Google started offering all of Feedburner's services for free shortly after they acquired them, so it would be logical to suspect that some kind of price cut, potentially all the way to free is coming for Postini's services.  That's not good for other folks out there trying to make a profit on their anti-spam services.
3. If you look at Google's recent enterprise oriented acquisitions they are building a pretty compelling set of hosted applications.  Not only do they have e-mail covered but they have the big three productivity apps (word processor, spreadsheet, presentation) covered as well.  They also added in Wiki capability (via JotSpot).  To link all this together all they need is a hosted file server and integrated search across all these apps (basically a hosted version of Google Desktop).  That's a pretty powerful suite of services.
4. Over the years, Postini received lots of inbound M&A interest, but the only bid they hit was Google's.  I think this speaks to two issues that other companies attempting to compete with Google in the M&A market have: 1) Google not only can afford to pay more for companies, it does pay more.  Google's competitors simply can't compete with Google's prodigious cash flow, multiples, and willingness to take dilution.  2) Google not only pays more, but is perceived as a better place to work by most targets.  Thus, the management team is happy to support a Google deal because they know their team will be happy.   This does not bode well in the short term for Google's competitors.