• Barron’s Online, Monday, April 6, 2009 12:04 PM

Web companies have a pretty poor track record when it comes to M&A. In a research note a few weeks back, Sanford Bernstein analyst Jeffrey Lindsay noted several examples, including AOL-Netscape, AOL-Bebo, Yahoo-Flickr, Yahoo-Broadcast.com, even Google-YouTube. In the note, Lindsay advised the likes of Google and Microsoft to stay away from Twitter and other pre-business model startups.

Following Friday's speculation that buying Twitter is exactly what Google intends to do, Lindsay reiterates his claim in a new research note, saying that Internet companies should stop buying startups with no visible means of supporting themselves and should instead give their excess cash back to shareholders in a once-a-year dividend.

In fact, Lindsay implies that the entire Web 2.0 company creation mechanism is something of a Ponzi scheme (but he doesn't use that term), says Barron's Online's Eric Savitz. "This amounts to little more than a mechanism to recycle the shareholders' funds from successful Internet companies back to the Silicon Valley venture capital community," says Lindsay. "The billions of dollars on most Internet players' balance sheets are thus increasingly the primary mechanism for the venture capital industry to get paid for Internet start-ups." How do you stop this cycle? By taking cash out of the picture in the form of a shareholder dividend, he says.

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