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Media M&A Attracted by Model Differentiation

As Web properties are proving to be genuine businesses, their success brings along some unwanted baggage. Fledging digital media companies typically need a merger with an established media giant or capital infusion from an initial public offering to continue growing fast enough to beat back rivals and leap to higher levels.

The trouble is, as the price tags on digital media properties skyrocket, Wall Street investors and potential buyers in old media are skittish. Buyers remember the raft of promising Web acquisitions that were short-lived shooting stars. Alta Vista, the top search engine in the late 1990s, was eclipsed by Google after failing three times to mount an IPO. So some established media giants, put off by today's swelling price tags, are instead funneling excess cash to shareholder dividends.

Amid the gridlock over valuations, Kagan Research believes the Web space won't experience big-ticket mergers and acquisitions commensurate with its economic clout in the near term. Instead, expect a raft of medium-sized and small deals that represent cautious bets by buyers. Major media companies might mount IPOs for their digital businesses � mainly to highlight valuations that would otherwise be lost within the parent, and secondarily for some quick cash.

A moderate flow of M&A percolates including two acquisitions by Viacom-owned MTV. It agreed to pay $200 million for video content and game website operator Atom Entertainment and separately agreed to purchase for an undisclosed price Y2M: Youth Media & Marketing Networks. Y2M is in a stable (differentiated) niche because it provides web services to 450 college newspapers that would be difficult for any rivals to replicate, according to Kagan Research.

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