From Briefing.com...
Internet Merger Mania : We argued in a recent Stock Brief that phase I of the Internet as a stock phenomenon was over, and that we are moving on to phase II -- a maturing of the Internet sector that will emphasize picking the winners rather than closing your eyes and picking anything with a dot-com on it. Recent market activity supports this view, particularly the poor performance of some low quality IPOs. But there is another aspect of phase II that is noteworthy: consolidation. Two prior Story Stocks today detail a rumored CMGI (CMGI)purchase of Compaq's (CPQ) Internet assets and Metromedia Fiber's (MFNX) acquisition of AboveNet (ABOV). And of course there are rumors today that Gateway (GTW) will acquire Earthlink (ELNK) and Amazon (AMZN) will acquire Beyond.com (BYND). This frenetic merger activity will become the rule rather than the exception in the Internet sector. Consolidation will be driven by two factors. First and most important is the perception -- most likely correct -- that most Internet industries will be dominated by perhaps three players, and numbers 4, 5, 6, and beyond will suffer. This has been the case in most other tech sectors in recent decades; CSCO and LU in telecom equipment, MSFT in software, INTC in semis, and DELL in PCs all come to mind. The second factor is the incredible pressure on Net companies to meet revenue estimates.Lacking earnings, most Net companies are valued on revenues. If revenue growth slows or halts, the chances that a company's earnings will ever justify its current valuation becomes remote. The market will punish companies that come up short on revenues -- note today's decline in Cyberian Outpost (COOL)after it reported a sequential revenue decline yesterday. One way to avoid that danger is to achieve revenue goals through acquisition. Of the current rumored mergers, we see one in each of these categories -- AMZN/BYND would be an example of a leader attempting to solidify its dominant position, while the rumored MLTX/MARG deal would be an example of a revenue-driven merger (we have no idea if either rumor is true, but they are good examples). Though it's a dangerous game, one way to play phase II of the Internet phenomenon is to identify merger candidates. Pick correctly and you get a nice premium; pick incorrectly and you might ride an also-ran down 50%. We'll be writing more on this theme more in coming weeks/months. - GJ |
