Growing Demand Blog

As the co-founder of Demand Media and the guy leading the M&A efforts for the last three years, I am often asked what Demand is looking to buy next and when deal volume will pick up.  Most Wall Street analysts and many CEOs point to a ‘value gap’ as a reason for the lack of deals.  They argue that public market values are depressed, and that private company valuations are too high.  While this logic makes sense, it fails to recognize the internal battle that many acquirers wrestle with, namely the tradeoff between innovation and integration.

Since inception in ’06, we have purchased websites, software companies, applications, databases, video libraries, and infrastructure companies, each one with a slightly different business model.  Every one of those deals has been subject to fairly rigorous financial and risk analysis, but it took a while (and a few missteps) for us to have a comprehensive integration analysis in place that was equally as rigorous. 

Only by completing a number of deals did we fully comprehend the TRUE cost of any acquisition –the time and effort associated with integrating each and every aspect of the business acquired.   Great internet companies build innovative products, and it’s hard to build great products when you’re busy integrating. Somehow we managed to do both, but I will say that the speed of our innovation was affected by the requirements of our integration.

The Pluck acquisition in early 2008 added a tremendous amount of creative talent, a number of high quality partners, and a pretty stable business.  After a fairly intensive integration process that lasted several months, we entered a real innovation cycle.   It feels like we are really hitting our stride right now.  New applications like the LIVESTRONG.COM iphone app have been created, new product features such as Pluck Groups have been launched, and new market-changing initiatives such as Pluck on Demand have been unleashed -- with a lot of hot stuff in the pipeline. 

The timing of this innovation is also concurrent with a slow in our M&A efforts and this is not coincidental, it is a true cause-and-effect relationship, and it highlights (at least for me) the inherent conflict that all companies face between integration and innovation.  So as we make our way into 2009 we have to balance the acquisition opportunities with the now-known cost of integration.

Given the market meltdown there will be an increasing number of highly accretive acquisitions and solid bargains available to those with strong net cash positions.  There will be, as Warren Buffet wrote in his annual report this year, many mosquitoes swarming around the nudist colony searching for juicy targets.   While we will be on the hunt for juicy targets to expand our business, the bar for acquisitions has been raised because we are now a bit wiser.  The cost of integration is significant. 

For 2009, expect Innovation to trump Integration.