A Deep Dive into Capital IQ’s 2012 Internet Predictions

S&P Capital IQ has published a dozen predictions for the internet sector in 2012 (take a look at all of them onMarketWatch). After reading through them, I’m interested in four of them – they are pretty interesting. Let’s take a look at some of what could be 2012’s most interesting developments could be.

Disclosure: everything below involves my opinion and sometimes outright guesswork. Please keep that in mind. Now, let’s dive into it!

Capital IQ says: ‘Contrary to the view of many, we don’t expect 2012 to be a banner year for mobile advertising.’

From an IPO perspective, at least, I agree. Even with Millennial Media’ recent filing for an $75 mn IPO, the sector still has to mature a bit before we see ‘the year’ for mobile advertising. This is the year to strengthen up businesses and show outstanding growth, with talk of an IPO better suited to 2013 or beyond.

Capital IQ says: ‘We believe there will be at least a $1 bn offer from private equity firms to buy an Internet company. According to Capital IQ data, the largest-ever private equity purchase of an internet company was for $572 million, when Bankrate was acquired in July 2009.’

That’s a pretty hefty jump, but it does seem plausible. There’s a lot of money sitting on the sidelines, and acquisition competition from the likes of MicrosoftApple and Google – all of which have hefty amounts of cash on hand – could drive valuations higher for all bidders, including private equity funds. Further, there are a number of private companies that might opt for an acquisition instead of an IPO, and they could command substantial prices (LivingSocial comes to mind, but that’s instinct speaking).

If we’re going to play the guessing game for a moment, it could be interesting to see a private equity firm with aretail portfolio acquire a daily deals site and see if there are any synergies between the two. But, this is pure speculation.

Capital IQ says: ‘We believe InfoSpace will finally announce a significant M&A-related use for its considerable cash and investments.’

This is a good bet for strategic acquisitions, but it isn’t the only one. I wouldn’t be surprised to see several strategic acquirers reach into the market to snap up pre-IPO companies this year. Again, Google, Apple and Microsoft come to mind, as does Amazon. I’ve written here in the past that I wouldn’t be shocked to seeAmazon pick up LivingSocial. Just a guess, but I can’t shake the mental image.

Capital IQ says: ‘We think an internet company that completed an IPO in 2011 could be acquired in 2012, reflecting the considerable challenges of being a public company.’

Yup, without a doubt. In my mind, it’s narrowed down to Groupon and Zynga, which I realise isn’t exactly a revelation. Even though Groupon has been battered a bit since its IPO in November, the company is still hanging around its debut price. We’d have to see the impact of future developments on its prospects as an acquisition target. Right now, I’d bet, it would be cheaper to pick up LivingSocial as a way to enter the daily deals space.

And that leaves us Zynga …

Zynga didn’t enjoy a first-day pop, and it’s lost a considerable amount of value since its IPO last month. It’s in a tough business. The company relies on a steady pipeline of hit social games to drive revenue and earnings growth … with the former becoming increasingly expensive to acquire and putting pressure on the latter.

So, who would buy Zynga?

Again, we’re so deep into the realm of speculation that I feel again obligated to mention that. My guess is thatFacebook could be interesting. It wouldn’t need Zynga to generate the level of earnings that public shareholders would expect, as it could use Zynga-based interaction to generate additional ad impressions and data to be used in future ad targeting.

I don’t see Facebook making a move like this ahead of its IPO, however, for a number of reasons. First, it doesn’t have the cash on hand to make the buy (only $3.5 bn, last I saw). While Facebook did acquire Gowalla using its shares, the situation would be much different with Zynga, as Zynga is public and the deal would be much larger. After the IPO, at which Facebook is expected to raise $10 bn, a shares-and-cash deal would be more realistic, but for a newly public company, it could still be a challenge.

Google might be an interesting acquirer. While we are hanging out in Fantasyland, let’s think about it. Google has the cash (and the shares). It has worked with Zynga to make games historically released on Facebook available on Google Plus. And, Zynga has been looking for ways to gain platform independence (i.e., to lessen its reliance on Facebook). Google could help.

Further, Google is an experienced acquirer. Facebook, on the other hand, isn’t much of a dealer and it would be in the position of integrating a fairly large company, assuming the acquisition came after an IPO, in its early days as a public company. That’s a tough one for me to swallow.

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Source: MarketWatch