Internet portals to see shake-out — ICRA

According to an ICRA study on internet, Gogna said mergers and acquisitions (M&As) are likely to be a significant trend in the short to medium term, which would affect almost all the business categories of internet business.

In the content providing business, there would be increased activity in M&As in both value and quantitative terms, ICRA’s report on internet said. "Most of the take-overs are expected to be done with a motive to increase the content quantity on the website/portal. However, valuation of companies in this segment is expected to be of crucial importance," the study said.

The valuation methodology would differ on the basis of the quality and kind of content, target audience and business strategy, Gogna said.

Among the website software and service providers, the M&A activity is not expected to be very significant in quantitative terms, ICRA said.

Icra said the quality of manpower, availability of infrastructure and client list are the main criteria for valuing companies in the website sofware and service providing business.

Among the companies that provide infrastructure tointernet companies, ICRA said these companies are likely to pursue the M&A route to increase coverage and develop economies of scales.

"M&As between internet service providers (isps) is likelyto be motivated by the need to increase the geographical coverage and improve the quality of service whereas other acquisitions would increase the product portfolio of companies," ICRA said.

Further, geographical positioning and subscriber base areexpected to be the key parameteres in the valuation of potential take-over targets, the information services firm said, adding the segment was likely to witness increased M&A activity.

Icra said the increased competition in internet business would witness increase in marketing cost, reduction in margins and as an outcome, the internet business is expected to be volume driven in the future.

Dotcom shakeout in Europe: The collapse of online sportswear retailer boo.com marks Europe’s first major dot-com failure — but it will not be the last as reality replaces hype in the Internet sector, analysts said on Thursday.

"The days of funding dubious business propositions are over — there will be more failures," said Peter Bradshaw, Internet analyst at Merrill Lynch in London.

"We estimate 75 percent of European dot-coms will disappear either through consolidation or failure over the next few years."

Boo.com, launched last November after a series of delays, finally gave up the ghost and called in liquidators after its backers refused to support a $ 30 million restructuring plan.

The closure of the unlisted E-tailer, which was burning through some $1 million a week, is expected to lead to around 300 job losses, mostly in the UK.

Nigel McConnell, managing director of Electra Partners European private equity business, said such casualties were inevitable.

"It will take some of the froth from the sector in terms of excessive valuations…There are lots of businesses that are being started in a fast-paced sector and at the end of the day not everybody can succeed," he said.

Analysts said boo.com’s problems highlighted the precarious cash position of some dot-coms, particularly in the business-to-consumer (B2C) sector.

PricewaterhouseCoopers said in a report this week that the majority of British Internet companies could run out of cash within 15 months and a quarter of them within six months.

"Boo tried in a very ambitious way to be a global retailer. If they had got it right then potentially the upside was enormous. The problem was they burnt through huge amounts of cash and things went wrong," said PwC partner John Soden.

Share dealers warned boo.com’s collapse would scare off many investors, underscoring an exit from the sector which has already seen a major correction.

"It’s a case of once bitten twice shy and a lot of investors will be very wary of anything to do with this sector," said one dealer.

Several high-profile Internet public offerings have fallen below their initial offer price in Europe this year, including Britain’s lastminute.com, Dutch-based World Online and France’s Liberty Surf.

Venture capitalists insisted that potential remained for new companies to exploit the Internet but said a realistic business plan and strong management would be crucial in future.

"I wouldn’t say there is a liquidity crisis within the venture capital industry. I think start-ups and middle-stage companies that have got good product and long-term potential will continue to be supported," Brian Larcombe, Chief executive of Britain’s leading venture capital firm, 3I Group Plc said.

"We don’t appoint our own people but we try and ensure that there is a strong management team in the company from the beginning," he added. 3I was not one of boo.com’s backers. Industry experts said boo.com’s ambitious plans to take on bricks-and-mortar stores showed the tough fight that B2C operators faced as "old economy" companies start to gear up their own Web presence.

Only last week, 11 European airlines joined forces to launch Internet travel agency in a head-to-head challenge with dot-coms, and three hotel groups set up a joint venture which will allow customers to make online reservations across Europe.

But it might not be all bad news, as long as investors can sort the wheat from the chaff.

"The good news is that less capital will now be chasing the sector and that should eventually lead to higher returns," said Merrill Lynch’s Bradshaw.

Europe’s big Internet service providers and portals, which are well-funded, could emerge as the winners from the DOT-com shakeout as they increase their grip on Web traffic.