From Forbes.com:
forbes.com
Multiple Messages From The Buyout Of About
David Simons, Forbes.com, 11.01.00, 12:01 AM ET
Monday's acquisition of content Web site About by magazine publishing
powerhouse Primedia provided a sobering lesson on the perils of playing
net stocks as buyout targets, or even as long-term investments. It also
sends a disquieting message about the near-term future of the sector,
just when many are saying that the worst is past.
What is certain is that only nimble traders ever had a shot at making
money in About (nasdaq: BOUT).
The advertised $690 million, $35.70 per share price of the all-stock
deal--a 50% premium to About's Friday's close--was marked down by
investors as soon as trading opened. By the final bell, About was up just
1.3% to $24.19, weighed on by a staggering 25% decline in Primedia
(nyse: PRM) shares.
Since going public in March 1999, About stock traded lower than $24.19
only during the 14 market days prior to Monday's deal announcement.
Even then, the average daily price was $22.28. About's March 1999 IPO
was priced at $25 and had a first day trading range of $47.50 to $62.50.
The all-time high set in March 2000 was $105.81
Today, About investors are hostage to arithmetic that new media/old
media synergy will be hard pressed to escape anytime soon. About's
$26.8 million third-quarter revenue soared 240% versus the same period
last year. But Primedia's $395 million third-quarter revenue grew only 7%
over last year. Combined, the growth of the two companies would be an
Internet anemic 12%.
But for Primedia shareholders, 12% is almost a doubling of growth. You'd
think they would cheer, especially because it's now a slam dunk that
About will fulfill its pre-deal forecast of becoming cash flow positive by the
first quarter of 2001. Savings in marketing and administration expenses
via the acquisition should make About immediately positive for Primedia's
financials. So why did the stock tank? Because Primedia investors also
were confronted with problematic arithmetic.
Primedia Chief Executive Thomas Rodgers projected that over the next
year the deal would add $47 million to Primedia's earnings before
interest, taxes, depreciation, and amortization (EBITDA). That would
increase by 15% the $307 million EBITDA projected by Wall Street for
2001. However, because Primedia will increase its shares outstanding by
27% to pay for About, EBITDA would decrease 12% on a per share basis.
If Rogers' projection proves optimistic as merger projections often do,
Primedia investors will be even more in the hole. Today's stock market is
wary of being singed by synergy.
Most perplexing--and revealing--about the deal is that About did it at all.
The company certainly seemed to be one of the winners in the dot-com
shakeout. Its sites are the seventh-most visited on the net, according to
MediaMetrix. It has a $133 million cash hoard that would last more than
three years at the company's third-quarter burn rate, and indefinitely if
operating income went positive by March 2001 as the company projected.
In addition, with other dot coms struggling for survival, About was well
positioned to take them out, either by acquisition, marketing offensive or
just awaiting their attrition.
With all of that going for About, why sell now?
The question is italicized by how much the deal limits personal gain of
About executives. Founder and CEO Scott Kurnit doesn't vault into the
ranks of the Internet super rich. At Primedia's closing price on the
announcement date, his 1.35 million shares are worth $32 million, and all
but 30,000 of his options on 226,000 shares have an exercise price of
$27.50, making them currently worthless.
About's other executives and its employees fare about the same: 82% of
all outstanding stock options reported by the company's April proxy
statement have exercise prices between $25.78 and $29.54. So the option
plan terms that immediately vest all options if About is acquired are a real
booby prize.
Kurnit is as savvy as anyone in the online business. His roots in it date
back to the primordial days of two-way cable in the early 1980s, and a
1993-1995 stint as president of Prodigy in its pre-Internet formative years
when it was owned by Sears (nyse: S) and IBM (nyse: IBM).
Kurnit said that leverage from Primedia's stable of 100 magazines, 60,000
advertisers and 1,600-person sales force will enable About to "grow faster
and farther over time than as a stand-alone company." He's probably right.
Except About will be Primedia, so reward for that growth will at best come
only "farther over time."
Kurnit's unspoken message in doing the deal seems to be that things
won't soon get much better even for the best of dot coms--and might get
worse. So he harbored About in a traditional media company.
If dot-com leaders are cashing out now, what does that say about how far
down and for how long is the bottom? Sure, About is just a single data
point. But the reaction of Primedia's stock is vicious reversal of 1999's
so-called virtuous cycle.
The most sobering message is that the risk in an Internet stock today isn't
just that it might go down, but that the reward can be cut short by an
acquisition--the very thing that entices many investors to take the risk in
the first place. |
