• by Lynn Russo Whylly , January 2, 2008

The furious pace of investment in online isn’t likely to let up

The M&A game looked like an especially manic round of Hungry, Hungry Hippos in 2007. A good deal of time and money was spent shoring up digital core competencies. More than 141 digital properties were acquired in the first three-quarters last year. The most movement came from the interactive agency category, in which there were 43 transactions representing an estimated value of $6.8 billion, according to investment bankers Petsky Prunier.

Ad networks/exchanges and online lead generation categories were tied at 37 transactions; however, the value was disproportionately higher with ad networks and exchanges ($5.5 billion), than with online lead generation ($620 million), since lead gen is a lower-cost mechanism for reaching and identifying qualified customers and getting them to take positive action according to Mike Petsky, a partner in Petsky Prunier.

Mobile advertising followed with 24 transactions: $792 million in estimated value. “This, to me, is a second inflection point in the industry,” says Marta Martinez, senior vice president of corporate development for Media Contacts. “Unlike the first dot-com bubble, the start-ups and acquisitions we are seeing today are about adding measurable intelligence and increasing the return of advertising investment. We’re going from buying impressions to buying a connection with a specific consumer that has intrinsic value for the advertiser. This is huge.”

The monster deal was Microsoft’s purchase of aQuantive in May, representing a transaction value of $6 billion. Not far behind was Google’s purchase of DoubleClick in April, at $3.1 billion. Rounding out the top five were Yahoo’s purchase of Right Media for $680 million, WPP Group’s acquisition of 24/7 Real Media at $649 million and Google’s purchase of Postini at $625 million.

Google engineered three of the top 20 deals, while Yahoo and magazine publisher Lagardère SCA were tied at two. “Yahoo’s acquisition of Right Media helps them monetize a lot of their second-tier inventory,” Martinez says. “The addition of BlueLithium (the sixth largest transaction) gives them the targeting intelligence they need to optimize those pages so they can maximize their price when they sell that inventory.”

While AOL’s purchase of  TACODA was the only one of its deals to make the top 20, the company was quite busy in 2007, acquiring mobile advertising agency Third Screen Media, German ad serving platform ADTECH AG, and in November, signing a letter of intent to acquire targeted ad company Quigo. “AOL is no longer a publisher,” says Martinez. “They went from the business of content to the business of distribution centered around advertising. “They have a lot of inventory, and with powerful targeting technology from TACODA and Quigo, they can sell their inventory at a very high price.”

Two leading publishers — Meredith Corp. and Lagardère SCA — each acquired two digital agencies in 2007: Genex and New Media Strategies were acquired by Meredith while Nextedia and Jumpstart were acquired by Lagardère. “They bought these agencies so they can understand their advertisers better,” says Martinez. “They know consumers are going to the digital space and they understand that they need to go in that direction.”

We can expect more agencies to add technology skills and more publishers to acquire digital capability, says Martinez. Vertical or enthusiast driven ad networks will also be targeted by traditional media firms, Petsky says.

In addition, “large ad platforms will continue to seek out affiliate networks and large online lead gen platforms.” Petsky predicts that AKQA, acquired last year by General Atlantic, is being groomed to be the next aQuantive.

Petsky expects any stand-alone SEO firms left will be gobbled up in the year ahead, while e-mail service providers to the SMB market — the only place where there is still movement in this industry — will be acquired by year’s end, as well.