Hold on.......Clueless Investor
Mickey Mouse games
Putting a value on Infoseek deal
Lycos-USA Networks debacle left us clueless
By Darren Chervitz, CBS MarketWatch
Last Update: 5:40 PM ET Jul 12, 1999
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NEW YORK (CBS.MW) -- At first glance, it looked like good news for
Infoseek investors. But shares lost 11 percent Monday after Disney said it
would acquire the 58 percent of Infoseek it didn't already own for
tracking stock in a new company.
Disney (DIS: news, msgs) said it wants to complete the combination of
the Internet portal (SEEK: news, msgs) with its own Go network. If the
merger is approved, each Infoseek investor will get 1.15 shares of the
new and improved company, to be named Go.com and to trade on the
New York Stock Exchange as a tracking stock.
"The new structure will integrate management, align
interests and eliminate operational redundancies,"
the release said, pointing out that the merger would
also create one of those highly valued Internet
stocks that come in handy when pursuing
acquisitions.
Yet after some pre-market celebration, when
Infoseek shares rose by more than 4 points at one
point, investors began to wonder what the merger
actually meant in dollar terms. After all, this wasn't
a typical acquisition, in which Disney was giving
Infoseek shareholders a certain amount of cash or
its own stock, which has a clear value on Wall
Street.
Instead, non-Disney Infoseek shareholders were
going to get 28 percent in a entirely new company,
whose value was unclear and, in the end, going to
be determined by the market. The result of the
confusion: Infoseek shares fell 5 9/16 to 45 15/16.
See related story.
Aside from worrying about some difficult mathematics, investors also had
Lycos on their mind, said Jim Preissler, Internet analyst at Prudential
Securities. A similarly-structured merger between between Lycos (LCOS:
news, msgs) and the Internet assets of broadcaster USA Networks
(USAI: news, msgs) was torpedoed after Lycos investors thought they
weren't getting a fair value for their stock. See original story on Lycos
deal.
"Investors maybe have jaded eyes toward these type of deals," Preissler
said.
$6.7 billion valuation
Based on the terms of
the deal, Disney and
Infoseek executives
thought the combined
company should be
worth about $6.7
billion, according to
PaineWebber Internet
analyst Jim Preissler.
That was the implied market value of Go.com based on Infoseek's closing
price on Friday. The calculation: $51.50 divided by the exchange ratio of
1.15 times the 150 million shares that Preissler said would be outstanding
in the new company.
At that valuation, the non-Disney Infoseek shareholders will hold about
$1.9 billion worth of stock in the new company, about the same amount
they held in Infoseek stock prior to Monday's trading action.
The upshot: Investors who were holding Infoseek stock because they
thought they would get a premium in a takeover attempt were
disappointed.
Yet Preissler and PaineWebber colleague Christopher Dixon think the
deal was extremely fair for Infoseek investors.
"Why would [Disney] pay a 20 percent premium for a company [it]
already owns 42 percent of?" Dixon asked, calling the deal a "mouse hug"
because of all the assets Disney is contributing to the new venture.
In addition, shares in Infoseek had already risen about 41 percent in the
weeks after Disney first announced it was in negotiations with Infoseek to
expand its stake.
Happy mice
More importantly, said Dixon, the deal is going to pay off for Infoseek
investors a year from now. He estimates that the combined company
could have sales of $520 million for fiscal 2000, up from $350 million for
this fiscal year.
Applying a price-to-sales revenue multiple of 23 for the Internet
operations and a multiple of 14 for the Disney catalog business, the new
company should be worth $69 a share, implying a target price per
Infoseek share of $80 ($69 times the 1.15 exchange ratio).
"If you're in there for the long haul, you're as happy as you can be,"
Preissler said. But if you were counting on a short-term gain, you're
probably just clueless.
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