Signs of the Times: WebMD Calls off Acquisition

In mid-September, WebMD announced that it would acquire Marketing Technology Solutions (MTS), owner of the QualityHealth website and two other helth-centric Internet properties for ~$50M.  Now, barely 2 months later, WebMD announced, in a terse press release this morning, that it has backed away from a complete acquisition of MTS and has instead taken a minority stake in MTS and signed an advertising services agreement with the company.

A couple of scenarios may have led to the pull-back by WebMD.

  1. There have been several recent reports that Internet advertising is trending downward.  A recent JP Morgan report projects overall Internet advertising to slow from 19% growth in 2008 to 16% growth in 2009 (Note, this was JP Morgan’s second downgrade for Internet advertising growth this year, first in Sept., most recently, beginning of Nov.). That does not seem so bad until you look at their projections for “display ads” which dominate both WebMD’s site and the sites of MTS.  Here JP Morgan is forecasting a steep decline from 16% growth in 2008 to just 6% growth in 2009.  JP Morgan is not alone as Nick Denton, founder of Internet media network, Gawker, is even more pessimistic as to what is in store for 2009.  WebMD may very well be seeing the same things among their own customers and rather than take a risk on expansion through full acquisition, is taking a much more cautious approach.
  2. The other scenario, which is less likely is that upon closer review of MTS’s business (growth, customers, books, etc.) WebMD may have decided that MTS was not quite as valuable as they originally thought and that the $50M price tag was too steep a price to pay.

My bets are on the first scenario, which if true, will reverberate throughout the nascent Health 2.0 market.  As we reported during our attendance at the Health 2.0 conference, far too many companies were staking their livelihood on an advertising model.  Clearly, that will not be enough going forward and 2009 will be a very tough year for many.

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