M&A activity and investments in the interactive ad industry
declined in 2008 according to a new report issued by Petsky Prunier.

Deals were down 29% and acquirers and investors spent five times less than they did in 2007.

As reported by ClickZ, Petsky Prunier counted 167 reported deals in 2008. The fourth quarter, not surprisingly, was the weakest quarter of the year. There were 31 deals worth $346m in the quarter; deal volume was down 18% from Q3 and total dollar value was down 29% from Q3. Compared to Q4 2007, deal volume was down 55% and total dollar value was down 77%.

But don’t let the numbers fool you. 2008 wasn’t exactly a bad year.

As Petsky Prunier managing director Scott Wiggins observed:

“The comparison to 2007 is probably unfair. 2007 was probably a high-water mark in the online advertising industry. By contrast, many years would look especially less active than 2007.”

So where did the money flow in 2008?

Ad networks and exchanges were big, as were interactive agencies. Both industry sub-segments recorded 40 transactions during the course of the year.

Petsky Prunier noted that most of the interactive agency dealmaking was “selective (and predominately small in value)” and designed “to accommodate the evolving needs of agency clients, moving away from disparate specialists and platforms in favor of agencies with broad capabilities and geographic reach.

Only subsegment received “more attention” later in the year – email providers. This was the only one that saw more dealmaking in Q4 than in any of the previous quarters.

As for where the money didn’t go, online lead generation had only one deal in Q4, down from 13 in the same quarter of 2007. No SEM & SEO and affiliate network deals took place in Q4, although deal volume for these sub-segments was light in 2008 overall.

Turning to 2009, Wiggins predicts that dealmaking might “normalize” in 2009 if the credit markets unfreeze. There is money on the sidelines, as many companies were able to raise capital before the financial markets fell, and sellers are also more realistic.

One fourth quarter trend that might extend into 2009 – international expansion. Petsky Prunier noted that “Large agency holding companies continued to acquire interactive agencies [in Q4], pursuing international expansion and focusing on targets outside of the United States.

An overview of Petsky Prunier’s report can be found here.