• by Sara Holoubek , February 27, 2006

According to the Chinese, the Year of the Dog is auspicious for marriage. 2006 is a particularly long year in the Chinese calendar, which not only allows more time to make a match, but produces "two spring starts," a rare occurrence. Couples have also waited through long engagements as the inauspicious Year of the Rooster passed. So what do the Chinese do when such a fortuitous year arrives? They rush to get married.

The Watchful Dog

The same is true for M&A activity in 2006. As search-related firms dress for the dance, the watchful dog advises that while a single dose of anticipation is healthy this year, avoid jumping to conclusions. Sameet Sinha, vice president--equity research at Kaufman Bros., LP, agrees that there is still an appetite for SEMs, but comments that "the jury is still out.

"These are high-service, high-touch firms with gross margins of only 15 percent." So while Chinese mothers everywhere are urging youths to take advantage of opportune times, it might be advantageous to stand still. Sameet notes that there are a good number of small and profitable SEMs run by a founder content to cut him or herself a very nice check each year.

The Loyal Dog

Loyalty is more important than ever in the Year of the Dog, and it is recommended to take the high road for best results. Adam Gross, vice president-marketing at JEGI, describes how the best practices of survivors have created a favorable environment: "While M&A was on hiatus, smart firms reorganized expense structure, developed new platforms and improved content delivery channels. These are better firms with stronger balance sheets in a position to make acquisitions, essentially buying speed to market." Furthermore, the fact that interest rates remain historically low has been of help.

We observed that private equity firms are also sitting on billions of dollars to put to work, possibly starting a growing trend to take firms private. The benefit is clear; any CEO of a public firm will tell you that it is an arduous path.

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The Dog year and those under its influence are protectors of morals and defenders of the weak. Google enjoys playing this role, repeatedly taking in smart technologies even before the venture capitalists can get in the game. In fact, many entrepreneurs are building firms with the sole intention of selling to Google early and having access to the empire.

For those that do go the VC route and intend to sell big, Jeffrey Dearth, a partner at DeSilva+Phillips, points out that "it is easy to raise money, but harder to sell." Not that he is pessimistic; Dearth expects 2006 to be a very good year. He also suggests that the slow movement of agencies in acquiring search firms has opened the door for other potential buyers.

2007 Welcomes the Year of the Pig

If the Year of the Dog is about matchmaking, it is said that the Year of the Pig (2007) should focus on family matters and completing unfinished tasks, rather than starting new endeavors. If this is true, search-related firms will need to focus less on rapid growth of the top line number and deliver a healthy bottom line. Given the rapidly growing market, one can only hope that high-growth firms avoid cutting off their nose to spite their face--a definite "don't" for the Year of the Dog.