In downturns, Internet companies look to sell start-ups

By Anupreeta Das

NEW YORK (Reuters) - Many Internet and media companies that were busy buying start-ups in the boom years could shed assets they no longer deem central to their business, as the recession imposes an age of frugality.

Scathed by the heavy losses they incurred when the dotcom bubble burst in 2000, tech companies moved quickly to cut costs and focus on staying profitable as the current recession hit.

Now, as the doldrums linger, many are taking a hard look at the start-ups they bought during the good times, many of which were never a good fit. Some of those acquisitions could wind up right back on the sales block.

Venture capitalists, who invest in start-ups and recover their money by taking them public or selling them, say the dealmaking has already begun. Many expect more sales and spin-offs in the next few months as companies squeeze their assets for cash and reassess business strategies.

"In good times, companies acquire, in bad times, they divest," said Todd Dagres, a venture capitalist whose firm Spark Capital funded hot microblogging site Twitter.

Dagres and other venture capitalists said companies increasingly are seeking out private investors to gauge their interest in dealmaking. The talks usually center on small units that don't carry their own weight, or are no longer considered strategic.

"What you're seeing is very active triage," said Dan Nova, a venture capitalist at Highland Capital Partners.

"As Fortune 500 companies focus or refocus their core strategic mission, they're deciding if those acquisitions are still consistent with that mission," Nova said. "If they're not, (they will) try to sell or shut them down."

In recent months, top Web companies like Yahoo Inc and eBay Inc have begun cleaning out their closets.

As part of a turnaround strategy under its new chief executive, Carol Bartz, Yahoo has begun axing money-losing properties, such as Geocities, which it acquired in 1999.

Online auction giant eBay recently said it would spin off Skype, the popular Web-based phone company it bought for $2.6 billion in 2005.

EBay also sold back StumbleUpon, a start-up that helps people discover online content, to its founders and venture capitalists, two years after buying it for $75 million.

Time Warner Inc recently announced the long-awaited spin-off of AOL. Soon to be independent, AOL is putting its start-up buys, including social networking site Bebo, into a separate unit where they will seek venture funding or be folded if they are unable to survive.

Some venture capitalists said they witnessed a similar trend during the last downturn.

"There were large companies giving away divisions because they didn't want to sustain the expense anymore," Dagres said, adding that the sell-offs slowed down in 2003, once the economy began to recover.