Google Buys Into M&A Trend, More To Come Say Analysts

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Google reported Wednesday that it has acquired reCAPTCHA, a company that provides CAPTCHAs to help protect more than 100,000 Web sites from spam and fraud. The aim is to ensure the response is not generated by a computer. The acronym stands for "Completely Automated Public Turing test to tell Computers and Humans Apart," according to Wikipedia.

Words in many of the CAPTCHAs provided by reCAPTCHA come from scanned archival newspapers and old books, writes Luis von Ahn, co-founder of reCAPTCHA, and Will Cathcart, Google product manager. reCAPTCHA's technology aims to improve the process that converts scanned images into plain text, known as Optical Character Recognition (OCR). The technology powers large-scale text scanning projects, such as Google Books and Google News Archive Search, the two wrote in the blog post.

Google's announcement, which falls the day after the Adobe and Omniture $1.8 billion deal, is the latest to change the landscape for online advertisers and marketers. Kevin Lee, Didit cofounder, believes it is proof that if one company has something another perceives as valuable, getting acquired remains a good exit strategy. "It shows a certain level of health in the industry," he says, noting that some acquisitions are cash, others stock and the remainder a mix of both. "The companies are selling at reasonable revenue or earnings multiples. They're not selling at fire-sale prices. That's most indicative of the industry's health."

It appears that J.P. Morgan Analyst Imran Khan nailed the merger and acquisition trend related to Internet or related companies earlier this year when he published a research report in March identifying a possible acquisition trend for Internet companies in 2009. He notes that while acquisitions declined in 2008, large-cap Internet companies with cash and little debt will have an opportunity to make acquisitions this year.

The research report reads: "On a TTM basis, the large cap Internet companies in our coverage group grew FCF by 39% Y/Y. Since fewer companies have access to debt markets to make acquisitions, we think these cash-rich Internet companies will take advantage of the weak M&A market. In aggregate, our top 5 large cap internet companies have $26.8B in cash ($76.7B with MSFT and CSCO included)."

Khan's key attributes of acquisition targets include brand strength, product leadership, ease of integration and barriers to entry. He writes that acquirers will likely seek a company that garners recognition and respect from both customers and partners. Those buying the companies hold the power in the weak M&A environment, and will seek out companies that have the best product as viewed by customers, partners, and competitors. With an increasing focus on profitability in this weak economy, integration will hold more weight when deciding whether or not to buy.

Khan also wrote that of the SMID cap stocks J.P. Morgan follows, Omniture and MercadoLibre rank the highest across all the categories.

The Adobe and Omniture merger agreement filed with the U.S. Securities and Exchange Commission (SEC) explains that Omniture would have to make a $64 million cash payment to Adobe if it were to accept a "superior proposal." The clause, identified by Khan, notes that Adobe intends to finance the acquisition with cash, as well as an existing line of credit, and there are no cash contingencies on the deal. He downgraded the stock to Neutral from Overweight -- raising the target price to $21.50, because the upside for Omniture is limited.

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