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Let's make a deal
Internet companies are merging left and right. That could mean an opportunity for investors.
June 16, 2005: 1:17 PM EDT
By Paul R. La Monica, CNN/Money senior writer

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The butler did it! Shares of Ask Jeeves surged after IAC/InterActive announced it was buying the Internet search company.
The butler did it! Shares of Ask Jeeves surged after IAC/InterActive announced it was buying the Internet search company.
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NEW YORK (CNN/Money) There's a lot of wheeling and dealing going on in the online world.

Here's a quick look at some of the bigger Internet mergers announced in just the past few months.

The New York Times (Research) bought About.com from Primedia. IAC/InterActive (Research) is acquiring Ask Jeeves (Research).

DoubleClick (Research) agreed to sell out to investment firm Hellman & Friedman. eBay (Research) put Shopping.com (Research) in its basket. And most recently, newspaper publisher E.W. Scripps (Research) said it was buying closely held Shopzilla, a rival of Shopping.com.

This may only be the beginning, which could spell opportunity for investors.

After all, shares of Ask Jeeves are up more than 30 percent since IAC announced it was buying it in March. And Shopping.com has surged more than 20 percent since eBay said it would purchase it earlier this month.

"I think there is going to be more Internet consolidation," said Michael Mahoney, managing director with EGM Capital, a hedge fund specializing in tech, media and telecom investments.

More ad and commerce deals?

Mahoney said that Google and Yahoo! have clearly emerged as the Internet leaders, so other companies need to figure out where they fit in the dot-com landscape.

He said that online media is one area that will probably see more mergers and predicts that iVillage (Research), which specializes in online content for women, and tech news site CNET Networks (Research) could wind up getting bought.

Martin Pyykkonen, an analyst with Janco Partners, also thinks that there could be more online advertising-related deals. He said that some of the online ad agencies, such as ValueClick (Research) and aQuantive (Research), could be an attractive fit for offline ad firms like WPP Group (Research) and Omnicom Group (Research), which have not made a big foray into the online advertising world as of yet.

"We haven't seen much activity on the Internet from the traditional ad agencies. They have had their head stuck in the sand," said Pyykkonen.

Mahoney added that online commerce is another area where there is likely to be more mergers as well since that business is starting to mature.

"Internet retailers have got some challenges. They need ways to expand their franchises and they need to look at where the next opportunity will be to gain market share in retailing," he said.

Along those lines, there are a handful of public online retailers. And investors clearly seem to be betting that more mergers will take place in this area.

To that end, two small online commerce companies, closeout firm eCost.com (Research), and apparel retailer Bluefly (Research), both were up sharply on Thursday on substantially higher than average trading volume. Investors on message boards for both companies speculated that deals could be in the works.

Investors need to be wary

Still, betting on which company is going to be the next to take a whirl on the merger merry go round is extremely risky.

"With small and mid-cap companies, there may be the potential for a takeout, but it's just very hard to get ahead of that. It's a highly speculative way to invest and investors need to be very cautious," said Mark Mahaney, an analyst with Citigroup Smith Barney.

Investors also need to realize that there are scores of private Internet companies out there which could wind up being better acquisition candidates.

To that end, Pyykkonen said that now that Shopping.com and Shopzilla are in the process of being taken over, the only other major comparison shopping sites left that could be bought are private firms. Pricegrabber.com and NexTag are two companies he thinks could wind up being purchased.

And given the flurry of deals in the Internet sector, stock prices of many smaller firms have run up on rumors, making these companies more expensive to acquire.

As a result, Google and Yahoo! may be more interested in making smaller acquisitions of private companies, said David Edwards, an analyst with American Technology Research.

For a look at more Internet stocks, click here.

For more market news, click here.

Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking relationships with the companies.


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