Consolidation Sweeps Web Services Market

In the last few days, several once-promising Web services companies have been scooped up by larger companies. For a variety of reasons, vendors, service providers and investment companies are moving quickly to acquire Internet-savvy technologists at relatively inexpensive prices.

The most recent deal was sprung Tuesday afternoon when mobile communications services firm Motient said it signed a definitive agreement to buy Rare Medium for more than $190 million. Motient hopes to combine its two-way mobile and Internet communications services with Rare Medium's consulting and online brand development businesses.

On Monday, Seneca Investments, a holding company formed by Omnicom Group and Pegasus Partners II, said it would take a major stake in floundering New York-based e-services company Agency.com, purchasing shares belonging to the Web services firm's two founders, CEO Chan Suh and Kyle Shannon. After the cash purchase, Seneca's stake in Agency.com will be approximately 65.7 percent.

Also on Monday, Cable & Wireless said it entered a merger agreement to buy all outstanding shares of struggling Web services firm Digital Island for $3.40 per share. The deal values Digital Island at about $340 million, including roughly $49 million of debt.

New ownership is also in the works for employees of Proxicom, although the exact identity of the buyer was only recently settled. Late last month Compaq announced plans to purchase the respected Web services firm for $266 million and integrate the company into its Compaq Global Services group. But that all changed last week when Compaq's bid was beat out by Dimension Data Holdings' bid of $376 million. Compaq refused to match the Dimension Data bid, essentially taking itself out of the running.

One reason for the spate of deals is price. Since Web integrator companies began enduring revenue slowdowns and earnings meltdowns, many have seen the value of their share prices plummet. That, in turn, has made these companies very cheap. Analysts including Tom Rodenhauser of Consulting Information Services and Stan Lepeak of IT services portal Ajunto.com have repeatedly told VARBusiness that the dirt-cheap asking prices for many of these e-services firms, combined with many vendors' need to ramp up internal services capabilities, would lead to a rash of buyouts. Now that the deal-making has commenced, it is only a matter of time before some of the good companies are snapped up, they and others believe.