Takeover fever hits the Internet sector:
Technology News
Thu, 18 Jun 1998, 3:42am EDT
BN 6/17 AOL's Shares Rise on Report It Rejected Bid From AT&T (Update6)
AOL's Shares Rise on Report It Rejected Bid From AT&T (Update6)
(Updates with closing stock prices.)
New York, June 17 (Bloomberg) -- America Online Inc. may be
in play.
Shares of the No. 1 online service rose 5.5 percent
following a Financial Times report that AOL rejected a buyout bid
from AT&T Corp., the largest U.S. long-distance phone company.
The news sent up shares of Yahoo! Inc., Lycos Inc., Excite Inc.
and CNET Inc. on hopes that they'll be takeover targets as well.
America Online could fetch as much as $32 billion because it
can pitch everything from books to insurance to perfume to the
more than 12 million people who subscribe to its service,
investors and analysts said. That could attract potential bidders
such as Time Warner Inc. and Walt Disney Co., entertainment
companies that are struggling to reach a wide audience via the
information highway.
''It would give them an Internet audience that media
companies haven't been able to build,'' said Forrester Research
analyst Kate Delhagen.
AOL's service gives access to the Internet with a phone line
and modem, and also provides original content and content from
outsiders such as the New York Times.
America Online and New York-based AT&T declined to comment.
AOL shares rose4 7/8 to 93 7/8 after touching a record 95.
AT&T rose 1 1/16 to 63, CNET rose 10 1/2 to 56, Yahoo rose
8 11/16 to 130 5/8 and Excite rose 8 13/16 to 76 1/8.
Hunt for Audience
Analysts expect Internet companies to be snapped up by
acquirers because they're attracting so many consumers. In
addition to its individual subscribers, AOL's CompuServe has
about 2 million business customers.
''It's a big way to get your fingers around millions of
Internet customers,'' said Richard Read, an analyst at Credit
Lyonnais Securities who has a ''hold'' rating on Disney and a
''long-term buy'' on Time Warner. ''Access to customers is the
name of the game.''
Time Warner, along with MediaOne Group Inc., is using its
cable-TV lines to connect to the Internet at high speeds through
their service called Road Runner. But Road Runner so far has
attracted only about 90,000 subscribers.
Time Warner also offers content from its publications such
as People and Fortune through its Pathfinder service, started in
1994. Pathfinder hasn't developed a strong presence, though, as
Internet users opt to go directly to the magazines' own Web
sites.
Disney recently bought the remaining two-thirds stake in
billionaire Paul Allen's Internet-site designer Starwave Corp.
Disney also boosted its Internet presence with its 1996 Capital
Cities/ABC acquisition, which gave it sites such as ABCnews.com
and ESPN SportsZone.
Stock Surge
A bid for AOL likely would range from $120 to $150 a share,
said PaineWebber analyst James Preissler, who has a ''buy''
rating on AOL. The Dulles, Virginia-based company's stock price
has more than tripled in the past year. It could reach $150
within another year, investors said.
''As a short-term investor, I'd be happy. As a long-term
investor, probably not,'' said said Duane Eatherly, senior
technology analyst at Banc One Investment Advisors, which owns
about 700,000 AOL shares. ''I don't see a lot of benefit to AOL
other than a 70 percent premium.''
As attractive as AOL might be, Read and other analysts said
it's unlikely that Disney or Time Warner would be willing to pony
up $32 billion for it.
AOL's $20 billion market value is more than that of three-
quarters of the companies in the Standard & Poor's 500 Index. Its
price-to-earnings ratio is a lofty 450. The company had third-
quarter profit before charges of $39 million, or 16 cents a
share, on revenue of $693.6 million.
Time Warner's market value is about $41.8 billion, and
Disney's is about $77.9 billion.
''It would be a very expensive fit for either company,''
said Barry Hyman, an analyst at Ehrenkrantz King Nussbaum, who
rates Disney a long-term ''buy'' and Time Warner a ''buy.''
More likely, Hyman said, is that Disney or Time Warner would
buy a smaller Internet company such as Infoseek and build it up
internally to compete with America Online. Infoseek and Excite,
though, are free Internet sites that don't have a captive
audience.
Some analysts said America Online isn't interested in being
bought anyhow. The company revised its shareholder rights plan
just last month. It said there were no hostile bidders but it was
revamping the so-called poison pill because of the rise in its
stock price.
''They know they're on to something, and I'd be surprised to
see them give up control,'' Delhagen said.
AOL recently bought NetChannel, a Web-TV service, because it
wants to be able to deliver its service into America's living
room through the television, whether it's through phone or cable
lines, said analysts.
AT&T
For AT&T, the challenge is to quickly boost its presence in
the fast-growing Internet market to offset declines in its core
long-distance operations. AT&T's new Chief Executive C. Michael
Armstrong has formed several agreements with Internet companies
recently.
''It is not as clear what the synergies might be between
AT&T and AOL,'' said Paul Merenbloom, an analyst at Prudential
Securities, who has a ''hold'' rating on AOL.
Citing people close to both companies, the Financial Times
reported that Armstrong is said to have made an offer several
weeks ago ''comfortably above'' AOL's $19 billion market
capitalization. AOL Chief Executive Steve Case and Chief
Operating Officer Robert Pittman are understood to have rejected
the offer several days ago, the paper said.
If AT&T's bid for AOL fails, it could try to buy Microsoft
Corp.'s online network or another Internet provider instead,
analysts said.
''AT&T has been increasingly dissatisfied with its position
in the Internet service-provider market,'' said Brian Adamik, an
analyst at the Yankee Group.
AT&T's WorldNet unit, which provides Internet services, is
facing increasing competition from other phone companies.
Microsoft declined to comment.
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