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A Web of alliances

P. T. Jyothi Datta

It's mergers and acquisitions time on the Net as Indian Web sites join hands to survive.

Does size matter in cyberspace? Well, it seems to, going by the consolidation phase that cyberspace is passing through, with several `strategic alliances', mergers and acquisitions (M&A) happening in the Net world. But, as disparate dotcoms scramble to a lly with others, it's a far cry from the fairy-tale buy-out of Indiaworld by Satyam Infoway. Alliances are now tinged with the realism that today it's a strategy for survival.

`` The survival strategy has a ring of desperation to it,'' points out Ranjyoti Barooah, CEO, Brandquiver.com. ``The business models in the dotcom world have changed rapidly over the last few months. From being merely driven by venture capital funding an d IPOs, dotcoms are now being forced to create more worth for their shareholders. The alliances, mergers and acquisitions that one sees at present are driven by appraisals of business needs,'' he adds.

A close look at the synergies being forged in cyberspace reveals some of the staggering figures that are involved. Satyam is believed to have spent about $158 million in both stock and cash to acquire indiaworld, indiaplaza and cricinfo.

Another company making no bones of the fact that acquisitions are in the air is Rediff.com, with reported interests in India-oriented portals in the US, UK, South-East Asia and West Asia.

Recent acquisitions by Rediff include the eventual complete integration of women's portal footforward.com as its partner channel, after initially picking up a 26 per cent equity stake in the women's portal. In mid-July this year, Rediff also announced it s tie-up with ZDNetIndia.com, making it a partner channel on information technology.

ZDNet India's CEO, Shvetank Shah, disagrees that synergies are opportunistic euphemisms of otherwise desperate efforts at survival. ``It is a generic model that has been vindicated worldwide. Vertical portals, which are specific in their purview, tie up with large horizontal portals to leverage their traffic to their benefit. And, for the horizontal portals, it makes sense to outsource their content through such alliances,'' he adds.

Piyush Gupta, CEO, go4i, observes that M&As are a way to a stabler industry ``since they lead to correcting the imbalance between supply and demand from a consumer standpoint as well as from an investor standpoint''. ``The Indian market is too small to s upport the number of players that have entered and consolidation is therefore critical to create this balance,'' he adds.

Linking survival, consolidation and stability, he adds: ``M&As are a survival strategy which will increase traffic for the consolidated entities and therefore create a stabler industry.''

jaldi.com's COO, Sanjay Trehan, has another take on the rationale behind M&As. ``Depends on what one wants to achieve out of M&As. Sometimes if you want to achieve critical mass quickly, then the strategy is good, but unplanned and unfocused. Alliances t hat don't have a synergistic slant could prove counterproductive and a strain on resources,'' he comments.

Striking a similar note, Vikas Ahuja, Chief Marketing Officer, egurucool.com says: ``It is not just a question of survival. Everyone is looking at rapid growth and inorganic growth is better than organic growth. Tomorrow, more dotcoms are going to get in to alliances. The idea is to find synergies.''

As an industry observer points out, much of the consolidation is right now happening in the sphere of B2C portals, also the most visible because of their high profile `cash burn' advertising campaigns. The Internet space can be categorised into B2C porta ls, B2B portals and allied services which encompass Internet Service Providers (ISPs), content and technology providers and other support services. While some behind-the-scenes consolidation is already taking place in the B2B sphere, this observer says t hat the next phase could see even ISPs consolidating their strengths. ``It is a matter of time, it will happen,'' he predicts.

And, strategic synergies are not merely the domain of the big 'uns of the dotcom world. India-oriented portal go4i at present has alliances with travel portal net2travel.com, health channel emedlife.com, Web retailers tsnshop.com, contest2win.com and a r evenue sharing alliance with online bookstore firstandsecond.com.

Explaining the rationale behind go4i's alliances, Gupta says: ``We continue to forge a large number of alliances, though our alliances tend to be revenue-sharing transactions rather than equity transactions.'' However, he adds, this does not preclude equ ity transactions in the future.

jaldi.com, in its efforts to become market leader in the e-tailing segment, has adopted a two-pronged strategy that harnesses growth through collaborative marketing. It has brand level tie-ups that stretch across categories. For instance, it has alliance s with elabh.com, gharapna.com, net2travel.com, apnaloan.com, and alltimejobs.com. The other type of alliances are `button level tie-ups', which are more product-oriented. Its tie-up with emedlife is a case in point.

In its synergy with emedlife, Trehan points out, ``The alliance is on the basis of barter and no cash outflow from jaldi. They go beyond the banner exchange and are based on sharing revenue and communities.'' And, to what effect? ``By August this year an d at no cost to jaldi, our user base had catapulted from 40,000 to around 300,000,'' he points out.

But, will the dream buy of Indiaworld by Sify.com, that happened not so long ago, find a parallel in the near future?

``Not in the immediate future,'' says an emphatic Trehan. ``Dotcom valuations are going through a much-needed correction phase, but nothing is ruled out in the long run. Dotcoms with a solid business model will stay and those that add value to the custom er experience will reap the windfall,'' he adds.

Similar observations come from go4i's Gupta: ``The valuations for Internet businesses have already seen a sharp correction since April this year. In essence, some form of linkage to future cash flows has begun to be built into the value equation, rather than mere ideas or eyeballs being the drivers of value. While market volatility will continue to effect specific transactions, overall it is unlikely that the market will return to the previous heady days.''

Chandu Nair, Director of the Chennai-based Scope Marketing and a promoter of a chemicals business portal, e.chem.com, in which Satyam Infoway has taken a majority stake recently, says candidly, ``Ultimately, everything is a business proposition and not a bout eyeballs, stickiness, page views, page hits and so on. Initially, everyone thought that VCs were a Kamadhenu, but when they backtracked, everything went through the floor.''

If one were to look at the running of a stand-alone vortal, many issues come to the fore. Technology is one, especially the design and maintenance of a site. Access to the site is one other issue - how does a site ensure that enough traffic flows to the site? Marketing the site, then, needs its own infrastructural set-up.

Lastly, allied support which calls for a payment gateway to enable e.com transactions, digital security and logistics is a key issue. ``Loading all these costs onto one portal will see costs shooting up. But, if there's a clutch of portals with synergies , then this cost can be amortised over all of them. Remember, there are a whole host of activities associated with a portal and only a small part of it is Web-related, most of it is business-related,'' says Nair.

Issues like these will drive portals to ally with others rather than go it on their own. Nair says a credible name gives a better valuation and a clutch of portals under one umbrella can embark on joint promotion exercises as well as cross marketing effo rts which can lead to greater economies of scale.

Go4i's Gupta is convinced that cash burn-outs too will drive alliances. Says he: ``Consolidation will quicken in the next few months, as various dotcoms run out of cash. Given the nature of the industry, debt financing is virtually unavailable. So, all financing is equity-led or VC-led. And, as VC appetites become more selective, cash will dry and consolidation is the only alternative to bankruptcy for many players. At the same time, the survivors and winners are just as rich as perceived. The change i n the process dynamics creates very high operating margin opportunities for the winners, Yahoo!, for instance, and very strong growth opportunities as well.''

Dhruv Sharma, CEO, 123India.com, points out that the ensuing emphasis on realistic valuations does not mean there would be no more buy-outs. Small portals will continue to sell out to widen their scope, while large portals will buy out to strengthen thei r position.

Size does matter, for horizontal portals. But vertical portals would continue to hold their own, feels Brandquiver.com's Barooah. ``But the flip side of the consolidations is that realism has come into valuations. Realisation has dawned that the people-o riented dotcom business is not merely about euphoric valuations, but about serious business needs that require serious skills to make an idea work,'' he says. About time, one should think.