LOS ANGELES TIMES 8/5 Expectations High for GeoCities, CitySearch IPOs
By KAREN KAPLAN, Times Staff Writer
he Tech Coast will be hosting a coming out party of sorts
next week, when two of its marquee Internet
companies--GeoCities and CitySearch--offer their shares to the
public for the first time.
The pair of initial public offerings is expected to grab the attention of
Wall Street and venture capitalists, who have long been accused of
overlooking high-tech companies here in favor of their counterparts
in the flashier Silicon Valley.
"There is a feeder mentality, and success breeds success," said Cliff
Numark, program director for the Los Angeles Regional
Technology Alliance. "The significance of these IPOs is that the
L.A. area is finally getting the credit it deserves for having hard-core
technology companies."
Both Santa Monica-based GeoCities and Pasadena-based
CitySearch are poised to cash in on their efforts to create a sense of
community on the vast computer network. GeoCities provides free
Web sites for roughly 2 million "homesteaders," then arranges them
into "neighborhoods" based on themes such as sports, arts and
family. CitySearch (which counts Los Angeles Times parent Times
Mirror Co. among its investors) builds local guides for cities
including Los Angeles, San Francisco and New York.
By focusing on what's on a Web site instead of the hardware or
software that is used to build it, both companies are making the
most of their Southern California location, said Bill Manassero,
executive director of the Software Council of Southern California.
"They're both content companies, and this is Hollywood," he said.
"That certainly helps leverage these companies."
Shares of both companies are expected to rise significantly in their
first days of trading on the Nasdaq market, which coincidentally are
scheduled for the same week. Some analysts are even comparing
GeoCities to Broadcast.com, the Dallas-based Internet firm whose
stock jumped a record 248% in its first day of trading last month.
"I wouldn't be surprised if it has a similar performance," said Tom
Taulli, a market analyst who focuses on high-tech companies for
IPO Monitor in Calabasas.
However, Taulli cautioned that if the stock market--which lost
3.4% of its value Tuesday--continues to decline during the next
week, both companies might end up delaying their public offerings.
Among thousands of Internet start-ups, 3-year-old GeoCities has
a unique business model. Instead of paying for the content it needs
to attract visitors, the company gets it from so-called homesteaders
who build Web pages() for free on the
GeoCities site.
GeoCities then charges companies to advertise on its members'
pages (although members can keep their sites ad-free if they pay
GeoCities a few dollars a month). The company also collects
transaction fees from some partners who sell their wares on
GeoCities sites.
The GeoCities community has emerged as one of the most popular
places on the Internet and regularly ranks among the top 10
most-visited Web sites. According to a recent report by Internet
traffic counter ReleventKnowledge, about 14 million individuals
rack up more than 850 million page views on the GeoCities site
each month. Those are the kinds of numbers that convince
advertisers to spend money on the Internet.
"The fact that homesteaders set up their own home pages within
GeoCities engenders a high degree of loyalty," said Ryan Jacob,
portfolio manager of the Internet Fund, a mutual fund based on
Long Island. "The challenge for them will be to leverage that traffic
into more substantial revenue streams through signing more
advertising and marketing agreements."
Jacob, among others, is optimistic. Last year, GeoCities lost $8.9
million on revenue of $4.6 million, but the company is on track to
more than double its revenue this year. Although GeoCities
reported a total deficit of $15.7 million in a filing with the Securities
and Exchange Commission, Jacob said he wouldn't be surprised if
the firm breaks even in the next 12 to 18 months.
GeoCities plans to offer 4.75 million shares to the public for $12
to $14 apiece. That would net the company between $57 million
and $66.5 million to expand the business, which currently employs
about 115. If the stock follows the lead of other recent
Internet-related IPOs, GeoCities' early investors--including tech
firms Softbank() Holdings, Intel and Yahoo--will be richly
rewarded.
The outlook for CitySearch is somewhat less rosy, but analysts
expect it to turn in a solid performance in its first day of trading. The
company plans to sell 4 million shares in the $11-$13 range to raise
between $44 million and $52 million.
Two-year-old CitySearch has launched a dozen Web sites--with
five more in the works--in conjunction with newspapers including
The Times, the Baltimore Sun, the Washington Post and the Dallas
Morning News. The sites offer information on local events and
attractions, including entertainment, sports, dining and shopping.
CitySearch makes its money from advertising, especially from
smaller local businesses and from online classified listings.
Sound like a good idea? It did to software behemoth Microsoft and
online giant America Online(), which both offer
competing city guide services. Microsoft's Sidewalk venture has 10
local Web sites, and AOL has launched more than 50 of its Digital
City sites.
"It's going to be a very, very competitive environment for them
against two other companies that are going to spend heavily to
promote what at first glance are very similar sites," Jacob said.
But analyst Taulli noted that the competition proves CitySearch is
operating in a vital market. He also praised CitySearch for getting
newspaper partners to supply local content instead of trying to
create it all from scratch.
Still, CitySearch, with 560 employees around the world, has spent
plenty of its venture capital. The company lost $36.5 million in 1997
alone and has a total deficit of $58.7 million. Revenue, by
comparison, is meager: $6.2 million for 1997, plus $3.1 million for
the first three months of this year. In addition to Times Mirror,
CitySearch counts Intel, Compaq Computer, AT&T Ventures and
HSN/Ticketmaster among its early investors.
In part, the success of GeoCities' and CitySearch's IPOs will
depend on whether demand for Internet-related stocks remains
strong. If Internet traffic stops growing at a record pace, or if a
bellwether company like Yahoo were to come out with bad
earnings, stock prices could easily fall throughout the sector, Taulli
said.
In fact, several analysts said that although Internet stocks are
overpriced, they expect investor demand to keep pushing prices
even higher.
"The underwriters have some responsibility to shareholders to price
these stocks on some sort of a model that is closer to making sense
instead of pricing these to demand," said David Menlow, president
of IPO Financial Network in Springfield, N.J. The result, he said, is
often a huge run-up on the first day of trading.
If the GeoCities and CitySearch public offerings do enjoy a healthy
run-up, they might not be the only Southland companies to profit.
"People have a negative perception about technology in L.A.," said
Numark of the Los Angeles Regional Technology Alliance. "To the
extent these are successful IPOs, it diminishes that perception."
The halo effect would most likely benefit other Internet and
multimedia firms on the Tech Coast, but other high-tech industries,
such as biotechnology, could benefit as well, Numark said.
"Hopefully, this will help us gain some momentum," said Rohit
Shukla, director of the Alliance. "Hopefully, there will be renewed
interest in overall venture activity down here."
* * *
GeoCities
* Business focus: Provides free Web sites for "homesteaders" and
arranges them into theme-based "neighborhoods."
* Location: Santa Monica
* Year founded: 1995
* 1997 revenue: $4.6 million
* 1997 income: --$8.9 million
* Expected offering price: $12 to $14 per share
* Number of employees: 114
* Management: David Bohnett, founder and chairman, Thomas R.
Evans(), chief executive
* Lead underwriters: Goldman Sachs, Donaldson Lufkin &
Jenrette, Hambrecht & Quist
* * *
CitySearch
* Business focus: Creates local city guides for the Web
* Location: Pasadena
* Year founded: 1996
* 1997 revenue: $6.2 million
* 1997 income: --$36.5 million
* Expected offering price: $11 to $13 per share
* Number of employees: 560
* Management: Charles Conn, co-founder, president and chief
executive
* Lead underwriters: NationsBanc Montgomery
Securities(); BancAmerica Robertson Stephens();
Donaldson, Lufkin & Jenrette()
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