Although the Internet has been around for a relatively short time, McKinsey research shows that Internet-related transactions already account for about 20 percent of worldwide M&A activity, both by value and by number of deals (Exhibit 1).

The drive for growth has spurred the deal making—in contrast to M&A in more mature industries, where the driving force is often the desire to reduce excess capacity and achieve economies of scale. When the buyer of an Internet company is another Internet company, it usually acts to build up its core business (for example, an on-line stockbroker acquiring a financial-information company); to extend an existing line (an e-tailer specializing in books and music moving into toys and tools); or to expand geographically (an Internet service provider or portal company buying portals outside the home market). Internet companies that buy "landed" (physical-world) incumbents generally come from the same or a similar sector (Exhibit 2). Incumbents typically make an acquisition to jump-start their own lagging Internet activities. Frequent targets for acquisition are dot-coms involved in business services, such as ISPs, Internet consultants, and business-to-business (B2B) service providers.

We expect growth to continue to be the primary rationale for Internet-related mergers and acquisitions. Like...