Wal-Mart-AOL? Or AOL-Circuit City? Depends on Whom You Ask
By Monica Rivituso
11/15/1999 4:30PM ET
THE RUMOR MILL cranked up today, churning out speculation that America Online (AOL) and Wal-Mart Stores (WMT) are discussing a strategic partnership along the same lines as Microsoft's (MSFT) and Tandy's (TAN) recent deal. But that's not the only possibility knocking around the Street. There's also speculation that AOL is considering a deal with Circuit City Group (CC). Spokespeople from both AOL and Wal-Mart declined to comment; both said the companies do not comment on rumors.
The divergent views are coming from two firms ? nothing shocking there. But the gusto in issuing research to support these respective views is taking an interesting turn, and some of the comments are beginning to take a snappish tone. Of course, there's nothing like a possible brick-and-mortar/Internet alliance to distract a market otherwise preoccupied with the Federal Reserve's meeting tomorrow.
Last week, Tandy's RadioShack and Microsoft announced a five-year alliance to jointly promote the software maker's MSN dialup and broadband services. Microsoft says it will open "store-within-a-store" formats in RadioShack locations and invest $100 million in RadioShack.com. Meanwhile, RadioShack will receive a portion of the revenue Microsoft collars from new MSN subscribers in the stores.
Ever since Tandy selected Microsoft over AOL as its strategic Internet partner, Wall Street has been kicking around whom AOL would team up with. Peter Caruso, a Wall Street Journal All-Star analyst at Merrill Lynch, speculated last Thursday that Circuit City could be a good fit for AOL. He noted that retail distribution is a key quality that AOL would be looking for as the company branches out into other areas. And Circuit City would be an attractive partner.
But Donaldson, Lufkin & Jenrette analyst Gary Balter fired off a note last Friday essentially disagreeing with Caruso. "We do NOT believe that Circuit is going to enter into an agreement with either party and management confirmed this view while speaking in Boston yesterday," Balter wrote in a note. He said Tandy and Circuit City are "very different retailers with different strategies." Today, he's saying Wal-Mart is discussing a partnership with the ISP.
Balter said that while he thinks that Wal-Mart and AOL are in discussions, he wasn't sure of the extent of the potential alliance. But he postulated it might be similar to the Microsoft-Tandy agreement. While Balter notes that an AOL deal probably wouldn't have a "significant effect" on Wal-Mart's core operations, he says the psychological impact of an AOL deal could give Wal-Mart shares a pop.
Then there's the obvious e-tailing benefit: Walmart.com could tap into AOL's gigantic customer base. AOL, on the other hand, could benefit from kiosks in Wal-Mart stores, especially in Europe, Balter says. The ISP doesn't enjoy the same strength that it does in the U.S. But Wal-Mart, with its current operations and future acquisitions, is expected to be one of the top three retailers in Europe in the next several years. "This could create an interesting tie-in," he says.
Balter acknowledges that there are many questions left unanswered about a possible deal. "[But] the fact that AOL is looking to partner with a brick-and-mortar retailers once again emphasizes the importance of having a dual-channel (both online and brick-and-mortar) selling strategy," he says. "As we have written previously, we believe that the longer-term winners in retailing will be those that combine a leadership position on the Web with a similar positioning on land."
Caruso hammered back with a note of his own today to further emphasize the rationale behind a potential AOL/Circuit City alliance. "Not surprisingly, there is not universal agreement that our speculation is reasonable that AOL may approach Circuit City as an alternative partner now that Radio Shack has selected Microsoft as their strategic Internet partner," Caruso said. Nevertheless, he contended that Balter's characterization of Circuit City and Tandy as very different businesses is a "serious misjudgment."
Whether there will be an AOL-Circuit City deal or an AOL-Wal-Mart deal remains to be seen. Of course, there may be no deal. The talk didn't do much for either Wal-Mart's or AOL's stock today. As for Circuit City, shares of the electronics retailer fell 5.25%. Tomorrow may not provide further answers to a potential deal, but it will likely draw a fresh round of research from Merrill and DLJ. |
