Ripples of worry in the Internet pool
Yahoo CEO frets over GeoCities deal as questions emerge
on whether deal can count as ‘pooling of interests'
OPINION
By Christopher Byron
MSNBC CONTRIBUTOR
March 3 — Isn't it great how, when every stock in sight is going straight up, nobody seems to think about what happens if they start coming back down? But what a difference a 32 percent decline in Lycos Inc. in the last four weeks can make — or for that matter, a 30 percent decline in theGlobe.com, an 18 percent decline in E*Trade Group Inc., a 6 percent decline in GeoCities Inc., and a 5 percent decline in Yahoo! Inc.
Christopher Byron BBS
Yahoo! stands alone
Internet euphoria turns to deals
ALL ARE REELING from the shellacking the whole Internet sector has been taking lately — a pounding that was easy to foresee and, in my opinion at least, isn't over yet.
What's more, it now turns out that this is an opinion shared, surprisingly enough, by Mr. Timothy Koogle, chairman and CEO of Yahoo. He has now let it be known, in a left-handed sort of way, that even he thinks the Internet sector is still over-priced.
We may deduce this from a nugget in Yahoo's recently filed 1998 annual 10K report to the Securities & Exchange Commission. The filing revealed that if Yahoo's planned merger with GeoCities fails to be treated for accounting purposes as a “pooling of interests” deal, then Yahoo just might be tempted to call the whole thing off.
This is instructive because it reveals that Koogle knows GeoCities — which was selling for $117.25 on Jan. 28, the day that the Yahoo deal was announced, and is now selling for $97.37 — is still over-priced.
Koogle knows this because, if Yahoo is prevented from accounting for the GeoCities deal on a “pooling of interests” basis and is instead required to treat the deal as a “purchase accounting” transaction, Yahoo's own shareholders will wind up, in effect, funding the over-payment out of their own pockets. The resulting bill will likely exceed an astonishing $3.14 billion, paid in $78 million annual installments for the next 40 years.
The reason Koogle is willing to pay this exorbitant price on a “pooling of interests” basis is that the over-payment simply disappears and no one will have to pay anything for it. Instead of having to take an annualized charge for the overpayment (referred to in accounting lingo as “goodwill”) in “purchase transactions,” the acquiring company in pooling-of-interests deals gets to pretend it never took place at all. This is based on the accounting theory that the two companies are virtually identical to each other and are simply being “merged” together at prevailing market prices.
The reason Koogle isn't much interested in GeoCities if he can't acquire it on that basis is that Yahoo can't afford to buy it on any other terms. For one thing, Yahoo itself is not nearly so wealthy a company as its $31 billion market cap would suggest.
GeoCities itself now carries a $3.2 billion market cap — and not even Yahoo can raise that kind of money to buy the company outright. Yahoo doesn't have much more than $160 million of cash on hand while GeoCities has about $100 million, which still leaves Yahoo more-or-less $3 billion short to swing a deal.
It is hard to see how any combination of debt and equity financing would even begin to close that gap. Even assuming that Yahoo earmarked every last dime of available cash flow to swing a loan, it is hard to see how it could raise even $1 billion through a debt offering — and that still leaves $2 billion more to come up with … via, what, a stock offering?
To raise $2 billion that way would require increasing the Yahoo float by nearly 20 percent, which would cause its market price to collapse the second the deal was announced. And after all that was done, the company would still be faced with $100 million in annual interest charges and nearly as much in goodwill charges — meaning that we would be far into the next century before Yahoo would once again report a profit. Meanwhile, Yahoo would have burdened itself with a junk business — GeoCities — that is likely to report somewhere around $15 million of revenues for all of 1998, along with something more than that in losses.
SHOW HIM THE MONEY
Yahoo CEO Timothy Koogle discusses his company's strategy in an interview with CNBC March 1.
But Koogle knows all that, which is why he doesn't want to pay cash — a reasonable amount of which would be a price so low that GeoCities would reject it out-of-hand. After all, if GeoCities were priced on a cash basis it wouldn't reasonably seem to be worth much more than its roughly $100 million of balance sheet cash and short-term assets — most of which came from its IPO last summer.
On a cash basis, that works out to roughly $3 per share for stock that is currently selling for just under $100. After all, a dollar is really worth only a dollar unless the company that owns it can demonstrate a capacity to turn it into something more — and that is something GeoCities has yet to show to anyone.
The problem Koogle now faces in all this is the exact problem the whole Internet sector confronts: Stock prices that have been wafted heavenward on hot air, hype, and vaporous expectations are now returning to earth.
I have been warning for months that the Internet bubble would eventually burst, and in recent weeks virtually every major institutional force on Wall Street — from the leading brokerage houses, to the Securities & Exchange Commission, to the National Association of Securities Dealers, and even the Federal Reserve — have begun sending out unmistakable signals of their determination to pop the bubble one way or another.
Now, sources at the Financial Accounting Standards Board have joined the fray, broadly hinting that they would like to scrap the entire “pooling of interests” concept in American business accounting. With the whole of the Internet sector heading into a period of intensifying consolidation, FASB's determination to do just that is shaping up as possibly the biggest setback yet to prices in the sector. By his company's filing to the SEC last week, Koogle clearly — and rightly — seems worried about what lies ahead. |
