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Valuation of the E-Commerce and Internet Services Industry

Posted on: Sunday, 12 March 2006, 03:03 CST

By Dolbeck, Andrew

The e-commerce and Internet services industry includes companies that sell goods or services online, including information products and informatio'n retrieval services. The industry also covers networking and other support services for companies that operate primarily on the Internet.

Industry Overview

E-Commerce ranges from simple websites supporting brick-and- mortar stores to giant online store operations such as Amazon.com and information service operations such as Google. There is no question that the high-end of the sector is big business; Google is expected to report 2005 revenues of about $4.1 billion, eBay around $4.5 billion, and both Yahoo! and Amazon are both expected to record revenues of over $3 billion.

Number of Public M&A Deals in the E-Commerce and Internet Services Industry

As the number of online shoppers increases, the demand for online advertising also rises. The four most widely visited Web properties, Google, Yahoo!, AOL, and MSN, will certainly benefit from increased interest in online advertising. Google commands roughly 15 percent of the total US online advertising market, with Yahoo! holding about 13 percent and MSN 10 percent.

Consumers are also becoming more comfortable with Internet security and online operations. More than half of all US households now pay at least one bill online. Online banking and stock trading are also gaining in popularity. This is good news for companies that support such operations, such as electronic payment services firm CheckFree and online stock exchanges E*Trade and Ameritrade.

As Internet support operations become more sophisticated, they will likely see demand from the online retail sector as well as from consumers. Security and payment applications service provider VeriSign, for example, has recently formed a strategic alliance with eBay. Under the terms of the deal, eBay's PayPal subsidiary will acquire VeriSign's payment gateway business for $370 million and eBay has agreed to invest in VeriSign technologies that protect online transactions.

Values and Productivity Measures for the eCommerce Industry

Online Data Services

Companies that specialize in providing research data online are encountering a new challenge: information overload.: The ease and availability of Internet and e-mail distribution have led to their clients being swamped with too much information from competitors, peers, and third-party research distributors. To counter this problem, Internet information companies are devising new product models.

Financial technology provider youDevise recently introduced the Trade Idea Monitor service that provides access to a repository of research data from different sources including Citigroup, Credit Suisse First Boston, Merrill Lynch, and others. Traditional data companies such as Reuters, Standard & Poor, and Thomson Financial are working on aggregated research content models as well. Reuters is also working to serve as a neutral agent between consumers and producers of financial data, since many financial data providers are securities brokers that must work under regulatory restrictions.

Median Price Ratios for Public Mid Cap M&A Deals in the E- Commerce and Internet Servcies

Median Price Ratios for Public Large Cap M&A Deals in the E- Commerce and Internet Services

International Operations

Internet-based retail operations have the advantage of easily functioning on an international level. Amazon.corn's strongest growth area is its overseas segment, where sales rose 26 percent in the last quarter of 2005 versus the same period in 2004. International sales make up nearly half of the online giant's revenue.

The Chinese market is particularly tempting. While less than eight percent of China's population currently utilizes the Internet, the rate is expected to increase rapidly over the next decade. Major e-commerce and Internet service players are investing now in order to be well positioned to capture this growing market. Yahoo! agreed to pay about $1 billion for a 40 percent stake in Chinese e- commerce business Alibaba.com. eBay has more than 13 million registered users in China and intends to spend $100 million to upgrade and market EachNet, it's Chinese operation.

Dealing in China can present legal and cultural challenges. Yahoo! and three other technology companies have been called before a congressional human rights subcommittee regarding their dealings in China. Yahoo! stated that it believes in openness and freedom of speech, even when Chinese laws have forced it to violate those principles. Yahoo! censors it search engine results in China to meet local government restrictions and has been accused of providing information to Chinese authorities that contributed to the conviction of a civil servant who criticized government officials online.

China's own online operations will also provide competition in the market. Alibaba.com's auction site, TaoBao is gaining ground on EachNet. The IPO of Baidu, China's second-largest Web search company, rose from $27 per share to $151 per share in its US market debut. Although share prices have since declined, the company still has an impressive $1.5 billion in market capitalization. Baidu commands about 32 percent of the Chinese search engine market, compared to market leader Google, which holds about 57 percent.

Outlook

The use of the Internet as an everyday tool continues to grow both in the US and abroad. As the Internet becomes more secure and consumers become more comfortable with its use, e-commerce can be expected to increase. As e-commerce increases, the demand for online advertising and Internet support services also rises. The e- commerce industry is likely to remain competitive, however, as more brick-and-mortar operations develop their online presence and online data and service providers seek to develop newer and more customer- friendly product models.

Sources: New York Times, securities Industry News, Value Line

Market Summary

By Andrew Dolbeck

Editor

Copyright NVST, Inc. Feb 20, 2006

Source: Weekly Corporate Growth Report

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