Berkery Noyes Exec on State of Ecommerce Mergers, Acquisitions

Every day, it seems, we read of an Internet-based company acquiring another one, or raising capital, or expanding into a new segment. Mergers and acquisitions for Internet companies are booming. To explain it, Evan Klein, a managing director of Berkery Noyes, a leading M&A advisory firm, recently spoke with Practical Ecommerce’s Kerry Murdock.

Practical Ecommerce: Your company, Berkery Noyes, just released its mergers and acquisitions trend report for the online and mobile industry for the first 6 months of this year. What is the state of mergers and acquisitions for that segment?

Evan Klein: It’s actually been a great first half of the year. The transaction volume on the first half of 2014 increased by over 7 percent from the last 6 months of 2013. It went from over 1,100 transactions to 1,227 transactions for the first 6 months of the year.

When we look at transaction volumes for the first half of 2014, it rose by 57 percent over the second half of 2013. It went from 40.8 billion dollars to over 64 billion dollars.

Another interesting fact, when you look at the median revenue multiple, although that remained constant at 2.3 times, when we look at the median EBITDA multiple, that increased from 9.5 times in the second half of 2013 to 12.5 times in the first half of 2014.

Our report focuses on a number of segments, including ecommerce, e-content, and e-marketing. The most active segment during this 6-month period was the e-marketing and search segment, which had 336 transactions for the 6-month period. That was a 17 percent increase over the last 6 months of 2013.

PEC: You mentioned 1,200 total transactions. What, exactly, do you mean by a transaction?

Klein: A transaction, in this case, is where there’s a buyer and a seller and where there is a disclosed price. The largest transaction that happened in the sector was Facebook acquiring WhatsApp. That would be considered one transaction.

PEC: Of the 1,200 transaction for the first 6 months, what are some that stand out? You just mentioned Facebook’s acquisition of WhatsApp. What are some other notable transactions?

Klein: That one [WhatsApp] was, by far, the largest. That was over 16 billion dollars in value.

Also, there was Priceline acquiring OpenTable for $2.4 billion. That was a very large transaction, the second largest that happened in the market.

Similarly, TripAdvisor acquired LaFourchette, which is a European-based online booking platform. That transaction was for $140 million.

The other interesting fact that we looked at was in 24 months the most active acquirer in the sector was eBay, which made 8 acquisitions over the last 24 months.

PEC: Our audience is largely comprised of ecommerce merchants that sell physical products on a transactional basis. What’s the state of that M&A market?

Klein: In general, it’s good. Both financial buyers and strategic buyers are flushed with cash.

When you look at the companies that are being purchased, most if not all have a good mobile solutions and strategy. We think that’s a very important channel for an ecommerce company.

As it relates to ecommerce, Andy Dunn, CEO of Bonobos, a online clothing retailer, recently wrote a very interesting article. He does a great job of summarizing what an ecommerce company must do to successfully navigate in what is today a very competitive market. If you try to compete just on price against the likes of Amazon, that’s a very difficult proposition.

Andy came up with four strategies that makes a lot of sense to us. His first strategy was for the company to have proprietary pricing. An example of that would be the Gilt Groupe, Thrillist, and Rue La La, or other flash sale companies that offer temporary price breaks on goods. They’re offering, at specific times, a unique set of goods at unique pricing.

The second strategy that he looked at was a company that had proprietary selection, a site that has a very narrow but deep focus for a particular audience. Examples that he gave was such companies as Marktkauf, which focuses on vintage clothing, or Nasty Gal, a fashion retailer.

The third strategy he looked at was a proprietary experience, sites that created new models of engagement for their customers, such as Birchbox, which is a beauty discovery platform, or JustFab, which focuses on shoes or bags. These sites are for customers with a monthly subscription service. We think it’s a new business model that’s very interesting in the ecommerce world.

Finally, he looked at a fourth strategy, which is a company that had proprietary merchandise. These are sites that are trying to build their own brands with ecommerce as the core distribution channel. An example would be Bonobos, which, again, he is CEO of. They focus on menswear. A lot of folks have also heard of Warby Parker, which focuses on eyewear.

Those 4 categories — proprietary pricing, proprietary selection, proprietary experience, and proprietary merchandise — seem to be a focus of the successful companies today in the ecommerce arena.

PEC: What is your overall view of the online retail industry?

Klein: It’s very, very competitive. I think, if you look at the success of Amazon and all the companies that tried to compete with them — the successful ones like Zappos or Diapers.com — they acquired. But there are thousands and thousands of companies that either went out of business or are struggling because Amazon has built up the largest distribution system. They can afford to price the products on very thin margins.

At some point, Amazon will likely be the largest retailer in the country and, potentially, the world. They could afford to have a very long-term strategy in terms of pricing their goods. It goes back to the 4 strategies — try to compete with them on price and you’re not going to win.

PEC: You’re a managing director at Berkery Noyes, a mergers-and-acquisitions firm. Could you tell us about your company?

Klein: Our firm has been in business 30 years. We have 25 professionals. We are an independent investment bank. We provide M&A advisory services to middle market companies. One of the sectors I cover is online media. We look at the ecommerce arena as being part of that sector. We have very strong coverage in the sectors that we focus on.

We also raise capital for companies. We’ve closed over 500 transactions as a firm. We close about 20 transactions a year. Each member of the senior management team, the managing directors, all have 20-plus years of experience. It’s a very deep group of senior professionals that have very long history within the sectors that they cover.

PEC: How do you determine valuation for a company, such as an ecommerce firm?

Klein: There’s three methodologies that most bankers use in determining value. One, look at the company and try to find public companies that are similar. That gives you some indication of the public market values of a company-specific space.

The second methodology we use is we look at past M&A transactions, for similar companies to the one in question.

The third option is called the discounted cash flow methodology. That’s where we look at projections based on management’s belief over the next 3 to 5 years in terms of how the company is going to perform. We look at the projected cash flows generated from those revenue streams and then we discount those cash flows back at a discount rate that takes into consideration the risk that a potential buyer is going to take on by buying the company.

Generally, we look at all three of those methodologies and come up with our best guess of value of that organization.