The innovation cycle has accelerated for the Internet in the last 2-3 years, fueled by social, mobile and local. These themes have given birth to hundreds of private Internet companies that are gaining traction (see our list of top 400 on page 3). As a result, we expect a very strong pipeline for Internet M&A and IPOs in the next 18 months, also supported by healthy capital markets and arguably no miss-alignment on valuation multiples expectations. In our view, increasing M&A/IPO activity reinforces the trends of continuing high secular growth, faster than expected adoption, and massive global expansion of the Internet. This secular adoption of the Internet and the innovations/new business models create a need among the largest Internet companies to refresh their product portfolio and to develop stronger competitive moats around their core offerings through acquisitions. In our view, Google, Amazon, eBay, and Yahoo! will remain highly acquisitive in 2011-12.
Key points
• Top 15 private Internet companies: 1) Facebook, 2) Craigslist, 3) Wikipedia, 4) Mozilla, 5) Groupon, 6) Zynga, 7) LivingSocial, 8) Twitter, 9)LinkedIn, 10) Gilt, 11) Hulu, 12) KAYAK, 13) Travelocity, 14) Pandora, 15) Skype.

• Top 20 likely IPO candidates: 1) Facebook, 2) Groupon, 3) LivingSocial, 4) LinkedIn, 5) Zynga, 6) Twitter, 7) Skype, 8) Hulu, 9) NexTag, 10) Newegg, 11) Bankrate, 12) Brightcove, 13) Glam, 14) Tribal Fusion, 15) eLance, 16) Gilt, 17) KAYAK, 18) RockYou, 19) HomeAway, 20) eHarmony.

• Top private Internet Cos. We have compiled a list of top 400 US private Internet companies based on signs of traction, business momentum, global impact, brand awareness, revenue potential, and institutional capital support. This is a US only ranking and majority of them can be acquisitions targets & some IPO candidates.

• Top 10 M&A themes for the Internet: 1) Social Media, 2) Social Gaming, 3) Social Commerce, 4) Mobile, 5) Local, 6) Portable Devices/eReaders, 7) Payments, 8) Cloud Computing, 9) Vertical E-Commerce, 10) International.

• Public Internet companies with most cash. The 13 Internet companies we cover have nearly $83bn in net cash – MSFT & GOOG with $31.5bn each, AMZN with $8.8bn, EBAY with $4.8bn, and YHOO with $3.6bn.

• Most acquisitive public Internet companies: GOOG, GSIC, AMZN, & MSFT.

• Top likely Internet acquisition targets: Private – AdBrite, Digg, Etsy, Efficient Frontier, ForeSee, JumpTap, Mashable, Meebo, NetShelter, The Find, Stumble Upon, Yelp, and Zillow. As far as public Internet companies are concerned, webelieve that: DRIV, SCOR, TTGT, and VCLK are likely acquisition targets.

• Why are Internet M&As/IPOs picking up? On one hand, in the last 2-3 years the pace of innovation and secular adoption of the Internet has picked up, fueled by social, mobile, and local. On the other hand, large ‘Net companies are full of cash, combined with economic recovery & healthy capital markets. In our view, large ‘Net companies will remain highly acquisitive in the next 18-24 months.

• Internet M&A and major deals so far: There have been many noticeable M&A deals in the past 6-8 months: GSIC/EBAY, Quidsi/AMZN, Huffington Post/AOL, ITA Software/GOOG, Brands4friends/EBAY, and Fanatics/GSIC.