iVillage: Buyout Bait?

Recently, iVillage (Nasdaq: IVIL) has been the subject of a good amount of buyout rumors. True, rumors are often trumped up. But iVillage certainly would make a good target for a bigger player.

In fact, we have seen some recent M&A activity in the online content space. Perhaps the most interesting is from News Corp.'s (NYSE: NWS) Rupert Murduch, who has spent more than $1 billion on content properties like MySpace.com.

Why the interest in online content? Basically, that's where consumers are spending more of their time. This means less time with traditional media -- such as magazines, newspapers, and even TV. And this is where things become attractive for traditional media companies, as ad rates are flagging (think: reduced pricing power, ads less valuable) on the emergence of online media and other -- taking a bit of air out of their revenue sources.

And that's why content companies are growing at breakneck speed. As Rick Aristotle Munarriz indicated in a piece on Wednesday, iVillage doubled its earnings and saw an 80% surge in online website revenues for the third quarter.

While traditional media companies have compelling content and strong financial resources, the fact remains that these organizations have difficulty in transitioning to the intricacies of the online world. But through acquisitions, traditional media companies can quickly establish a toehold in the online world.

And that's why I think partnerships work. Big Media has huge amounts of resources, content, infrastructure, and brand. The online sites have built up loyal visitors over time and have also tapped into consumer groups that are tough to target, such as teens (as is the case with MySpace).

Shareholders are getting impatient with the lagging growth rates of traditional media companies, whereas the opposite appears to be the case with their online brethren. Take a look at Knight Ridder, the biggest shareholder of which pushed for a sale of the company.

So going back to iVillage, let's review the facts. The company has strong growth, an attractive demographic, and longevity in the market. According to Marc Strohlein, the vice president and lead analyst of Outsell, a research firm: "An acquisition would represent an easy way for a large, traditional media player to build their online audience quickly while picking up a brand that has panache and gaining expertise in ad-based revenue models."

The good thing for shareholders is that traditional media companies have established their willingness to pay high valuations for online content companies. And after the dot-com shakeout, there are only a handful of public online content companies left, like Motley Fool Rule Breakers pick CNET (Nasdaq: CNET) and Bankrate (Nasdaq: RATE). There seems to be a general willingness on the part of larger companies to pay premium prices for dot-com communities, and it seems like sacrilege at this point not to sell if a premium valuation is in order.

The fundamental question at hand is whether traditional advertisers continue to pump money into online advertising. I can't see why they wouldn't if that's where the consumers are going. As for health-care content, where iVillage resides, I think this is a good bet -- the Internet is ideal for getting this type of information, and health care is one of the most searched categories on the Web. And demographics are in iVillage's favor, as the population gets older and thus more concerned about health issues.

So it's not unlikely that buyout rumors will turn into deals, if you ask me. All of the elements are in place. "All Internet-only companies outside of Google (Nasdaq: GOOG) and Yahoo! (Nasdaq: YHOO) are targets of opportunity for legacy companies that need to make these acquisitions while they have the cash flow from existing operations to do so," said Rich Hanley, the director of graduate programs in the School of Communications at Quinnipiac University. "Think of this as a race against time."

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Fool contributor Tom Taulli does not own shares of companies mentioned in this article.