Many Internet and media companies that were busy buying start-ups in the boom years could shed assets they no longer deem central to their business, as the recession imposes an age of frugality.
Scathed by the heavy losses they incurred when the dotcom bubble burst in 2000, tech companies moved quickly to cut costs and focus on staying profitable as the current recession hit.
Now, as the doldrums linger, many are taking a hard look at the start-ups they bought during the good times, many of which were never a good fit. Some of those acquisitions could wind up right back on the sales block.
Venture capitalists, who invest in start-ups and recover their money by taking them public or selling them, say the dealmaking has already begun. Many expect more sales and spin-offs in the next few months as companies squeeze their assets for cash and reassess business strategies.
In good times, companies acquire, in bad times, they divest, said Todd Dagres, a venture capitalist whose firm Spark Capital funded hot microblogging site Twitter.
Dagres and other venture capitalists said companies increasingly are seeking out private investors to gauge their interest in dealmaking. The talks usually center on small units that don't carry their own weight, or are no longer considered strategic.
What you're seeing is very active triage, said Dan Nova, a venture capitalist at Highland Capital Partners.
As Fortune 500 companies focus or refocus their core strategic mission, they're deciding if those acquisitions are still consistent with that mission, Nova said. If they're not, (they will) try to sell or shut them down.
In recent months, top Web companies like Yahoo Inc and eBay Inc have begun cleaning out their closets.
As part of a turnaround strategy under its new chief executive, Carol Bartz, Yahoo has begun axing money-losing properties, such as Geocities, which it acquired in 1999.
Online auction giant eBay recently said it would spin off Skype, the popular Web-based phone company it bought for $2.6 billion in 2005.
EBay also sold back StumbleUpon, a start-up that helps people discover online content, to its founders and venture capitalists, two years after buying it for $75 million.
Time Warner Inc recently announced the long-awaited spin-off of AOL. Soon to be independent, AOL is putting its start-up buys, including social networking site Bebo, into a separate unit where they will seek venture funding or be folded if they are unable to survive.
Some venture capitalists said they witnessed a similar trend during the last downturn.
There were large companies giving away divisions because they didn't want to sustain the expense anymore, Dagres said, adding that the sell-offs slowed down in 2003, once the economy began to recover.
BIG GUYS, BAD BUYS
Not everyone agrees that the acquisition strategies of companies are linked to the health of the economy.
Mike Kwatinetz, a venture capitalist at Azure Capital Partners, said Internet companies often make mistakes because they covet a start-up without taking a long, hard look at how well the acquisition would fit into their business.
Companies have to have a strategy ... (You cannot) buy a company just because it appeals to you, said Kwatinetz, whose firm sold online payments company Bill Me Later to eBay for $945 million last year.
Some analysts have criticized eBay for overpaying for the start-up, but Kwatinetz defended the auction site's decision. Bill Me Later lets eBay provide a payment service for large merchants that do not use PayPal, thereby creating a complementary fit, he said.
I don't think you will see them do anything with (Bill Me Later) ... except integrate it into PayPal, Kwatinetz said.
Why do big Internet companies make bad acquisition decisions? Bernstein Research analyst Jeffrey Lindsay reckons it is a combination of factors.
For one thing, he says, Internet companies have gobs of cash on hand and very little debt. Add to that pushy venture capitalists waiting to foist sales of start-ups that don't yet make money and the hype around brand-name companies like Twitter and Facebook, and the stage is set for some questionable deals.
It's a recipe to tempt, invite disaster, Lindsay says. He lists AOL's acquisitions of ICQ, Netscape and Bebo (which it bought last year for $850 million), Yahoo's purchase of Flickr and Google Inc's acquisition of YouTube as examples of deals that kill value, and could any day be sold or shut down.
Downturns aggravate this trend because companies are forced to confront their poor business decisions when the going is tough, he said. It's a sad final acceptance and recognition that buying a certain start-up was not the best idea.
The experience of StumbleUpon's co-founder Garett Camp, who bought back his company from eBay along with a team of investors, bears this out.
Camp said both sides eventually realized the start-up was not really core to eBay's business. The synergies would (have) taken a while to develop, he said. So I figured it was the right choice for Stumble's long-term success.
(Reporting by Anupreeta Das; Editing by Phil Berlowitz)