THE McKINSEY QUARTERLY 2000 NUMBER 4
appeals to no one, least of all their core segment. They are better off cultivating core-segment customers who repeatedly purchase items of greater than average value. In time, new technologies will permit marketers to display the content and products that most appeal to particular user segments. Ultimately, segments based on demographics will give way to offerings informed by the tastes and needs of individuals.
—John E. Forsyth, Johanne Lavoie, and Tim McGuire
h fi i'"' n H h
Although the Internet has been around for a relatively short time, McKinsey research shows that Internet-related transactions already account for about 20 percent of worldwide M&A activity, both by value and by number of deals (Exhibit 1).
The drive for growth has spurred the deal making—in contrast to M&A in more mature industries, where the driving force is often the desire to reduce excess capacity and achieve economies of scale. When the buyer of an Internet company is
another Internet company,
More deals, more money: Internet M&A takes off
it usually acts to build
up its core business
Percent of total M&A deals
Percent of total M&A value
(for example, an on-line
that are Internet related
that is Internet related
company); to extend an
existing line (an e-tailer
specializing in books
and music moving into
toys and tools); or to
of M&A deals
(an Internet service pro^Through May 2000, excluding America Online-Time Warner deal (if included would vider or portal company
raise Internet-related M&A share of total value to 33%).
Source: Thomson Financial Securities Data; McKinsey analysis buying portals outside the
home market). Internet
companies that buy
come from the same or
a similar sector (Exhibit 2).
make an acquisition to
jump-start their own
lagging Internet activities.
Frequent targets for
acquisition are dot-coms
involved in business
services, such as ISPs,
Internet consultants, and
(B2B) service providers.
Birds of a feather
Number of M&A transactions^
When Internet companies buy other Internet companies, they usually stay close to their core business ...
. . . and when Internet companies buy landed companies, they usually buy from their own sector
We expect grov\/th to conBusiness
tinue to be the primary
rationale for InternetTelecom
related mergers and
Telecom Business Media
acquisitions. Like busiservices
nesses in traditional
Acquirer (Internet company)
Mil deals occurred between January 1,1998, and May 22, 2000, and were valued at more Internet firms operating
than S100 million.
^For instance, financial-services firms or companies specializing in retail and wholesale within the same sector
Source: Thomson Financial Securities Data; McKinsey analysis and with complementary
strengths will begin to
consolidate to achieve economies of scale.
There are several reasons to expect M&A to grow in importance: • Rapidly closing windows of opportunity. Purely organic development is often too slow to keep pace with rapid change in many parts of the Internet.
• Higher barriers to entry. Attracting customers is becoming prohibitively expensive in some of the more mature business and geographic areas. Thus M&A may be the only way to establish a foothold, even if the price is high.
More need for control of assets. Fast-moving businesses require simple, straightforward governance models founded on full ownership of assets as opposed to...