‘Dot-Com’ Doldrums Spurring Consolidations

Andy Solomon, chief executive of StreetZebra.com, a Los Angeles online guide to sports and recreation, looks at today’s colder investment climate for “dot-coms” and sees a buying opportunity. Despite the spring slump that hit tech stocks hard, he has bought two Internet companies since March.

“Whatever the markets decide to do, if we can bring businesses together to get scale, that’s a good strategy,” said Solomon, 35, a founder of StreetZebra, which offers amateur players and fans a way to register for sports leagues online, as well as to find and post game schedules, scores, team rosters and player photos. It also features Web sites devoted to teams and individual players.

In March, privately held StreetZebra bought Chicago-based Sport & Social Clubs of the U.S., and early this month, it bought Los Angeles-based Intramurals.com, a company devoted to college athletics. Terms of the deals were not disclosed.

These deals exemplify a growing merger trend among privately held companies in the Internet sector, said analyst Kurt Kunert of Mergerstat, a Los Angeles data service.

“Market volatility is one reason investors are looking more closely at these firms and see consolidation as a natural extension of those [viability] questions,” Kunert said. “This merger trend is going to keep growing, because these Internet companies can’t keep operating in a sea of red ink.”

Indeed, while last week’s business news was dominated by such mega-mergers as General Mills’ agreement to buy the Pillsbury business of Diageo for about $7.4 billion and online tech producer CNet’s agreement to buy Ziff-Davis for about $1.6 billion, unions among smaller, often privately owned firms are increasing, in part because of the market downturns in March and April that have made it difficult for some companies to get additional venture capital and for others to go public.

During June, the number of mergers involving at least one privately owned U.S. firm in the Internet sector increased more than 50% to 125 deals from just 81 during the same time last year. In April, the number of such mergers nearly doubled.

“Time plays an important role,” said Todd Jadwin, investment banker and head of new media with Banc of America Securities in Los Angeles. “To increase the pace of M&A;, you need a sense that markets have reached equilibrium and a motivating factor like the inability to get financing. That’s what we have now, so I think the pace will pick up in the second half of the year.”

Jadwin is now working on half a dozen mergers and acquisitions.

“That’s where I’m spending most of my time now, because the markets for initial public offerings have gotten much more difficult,” he said.

In fact, while March had the highest number of private mergers of any month this year, 161, and the second quarter had fewer such deals than the first three months, Wall Street bankers and entrepreneurs say these deals will only increase during the rest of the year.

Through June, there were 818 Internet mergers involving at least one privately held company, compared with 335 deals during the same period last year. The 210 of this year’s deals in which a value was disclosed were worth a total of $20.3 billion, versus 116 deals in last year’s first half worth $6.2 billion.

CraftClick, a Playa del Rey-based operator of an arts and crafts Internet site, was the busiest buyer nationwide in the first half, making 14 purchases of private Internet firms since January, according to Mergerstat. Most of its purchases have been small online companies devoted to a niche of the art world, such as needlepoint or tole painting, which is done on metal.

“We’ve bought mostly from people who started these sites five to six years ago--they needed to hook up with someone or face the fact that they wouldn’t succeed,” said Sandy Seth, president of CraftClick, formed in December 1999.

The firm expects to make 10 more acquisitions by the end of this year, he said.

In other financing news, El Segundo-based IBenefits, an application service provider that offers employee-benefit management tools, raised $41 million last week in a third round of financing. Investors include New York-based Capital Z Financial Services Fund and Palo Alto-based Trident Capital.

IBenefits will use the money to develop new ways to track employee benefits online, which it says reduces administrative expense as well as paperwork. It will also launch national business-to-business marketing efforts and upgrade its Internet equipment.

And in other news, Massoud Entekhabi, formerly the managing partner of the global technology group at PricewaterhouseCoopers in Woodland Hills, has left to join TL Ventures, a Wayne, Pa., venture firm that is opening a Los Angeles office. The firm specializes in seed and early-stage investments in biotech and network communications.

“Working with the entrepreneurs is a passion of mine and in this new capacity I can be more hands-on,” Entekhabi said.

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Dot-Combining

Wall Street bankers and others predict continued consolidation among privately held Internet companies, especially because stock market volatility has made it hard for some companies to go public or raise additional capital. Monthly totals of Internet mergers involving at lease one privately held company for this year and 1999:

Jan. 1999: 10

Jan. 2000: 122

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Feb. 1999: 13

Feb. 2000: 148

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Mar. 1999: 63

Mar. 2000: 161

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April 1999: 93

April 2000: 124

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May 1999: 75

May 2000: 138

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June 1999: 81

June 2000: 125

Source: Mergerstat

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Recent California Dealin’ columns are available at http://my.nohib.com/caldeal.

Debora Vrana, who covers investment banking and the securities industry for The Times, can be reached at [email protected] or Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012.