Apparently, this article hit Tuesday but no one noticed, so they posted it again today. Note the reference to Onsale a little bit down.
SMARTMONEY ONLINE: Everbody's A Target
This story was originally published on Tuesday
By Joshua Albertson
SmartMoney Interactive
NEW YORK (Dow Jones)--The trick's out of the bag.
How do Internet companies convince investors that they're really worth more than, say, 300 times
earnings or 100 times revenue? By buying another Internet company with an astronomical valuation.
Better yet, buy two.
It seems like months ago that Yahoo! (YHOO), which touched a 52-week high of 244 on Tuesday
morning, last traded hands for less than 170.
Actually, it was Friday. A lot can change in three trading sessions.
In this case, investors decided that Yahoo made the right decision when it agreed to exchange 0.7762 of
its shares for every one of broadcast.com's (BCST). At the time, the stock-for-stock swap measured
about $5.7 billion, a seemingly rich price, considering that broadcast lost $16 million on $22 million of
revenue in 1998.
But Yahoo picks up $5.7 billion in acquisition currency (read market capitalization) in its sleep. Today's
valuation high of $48.9 billion tops billion. Who's ever heard of getting richer by spending nearly $6
billion? Well, in the alternate universe of Internet stocks such things are possible, and there are plenty of
investors getting fat at the cyberspace investment bazaar. And whether or not earnings ever meet the
inflated valuations, the prospect of continuing consolidation could be fuel enough to keep this
phenomenal rally going.
Meanwhile, screening for Internet companies that may be acquisition targets is like screening for fish t
hat may have gills. "I think everybody's a target. I really do," says David Levy, who covers Yahoo for
ING Baring Furman Selz.
That might sound like an easy out, but it's hard to blame Levy for not naming names. In two months
time, Yahoo twice opened its wallet to pull out big bills - once for broadcast and once for GeoCities
(GCTY), home to a variety of Web communities. All the while, At Home (ATHM) was buying Excite
(XCIT); America Online (AOL) was buying Netscape; and USA Networks (USAI) was buying Lycos
(LCOS).
And those are just the 10-figure deals. On Monday, AOL traded an undisclosed number of its shares
for a Web calendar company called When.com. Tuesday, theglobe.com (TGLO), one of the Internet's
nouveau riche, shelled out about $50 million for Attitude Network, a publisher of entertainment Web
sites, including www.happypuppy.com. Happy Puppy's prophetic slogan? 'It's all games!" With the
exception of the USA Networks-Lycos deal, most of the current game playing is Internet-on-Int ernet
transactions. It's a trend Furman Selz's Levy expects to continue.
"I think you will probably see more intraindustry consolidation because the Internet companies have a
strong currency in their stocks and their investor base is a little less focused on their bottom line than the
traditional companies," he says.
That's not to say that earnings won't matter at some point - they already do matter for profitable
companies like AOL and Yahoo - but fungible valuation models allow Internet compan ies some leeway
not afforded to their more traditional counterparts. In other words, nobody blinked when Yahoo said
broadcast might dilute earnings for a year or so after the deal's completion.
Not only did nobody blink, but everybody's still staring admiringly almost a week later. And while
Yahoo's recent ascent can at least be partially attributed to growing optimism over Wednesday's
earnings release, investors are also sending the message that they like their Internet companies hungry.
In the real world, an appetite for dilution is a recipe for disaster. In the Internet world, investors are
willing to look beyond such pedestrian concerns.
Who will be acquired next? Maybe it will be an "affinity' portal like the newly public iVillage (IVIL),
whose strategy of delivering tailored content to a targeted audience is some analysts" vision of the
Web's future. Or maybe it will be a commerce site like Onsale (ONSL), which is gaining visitors but
losing money with its at-cost sales program. Or maybe a company that provides "utility" services like
email or calendars, must-have competencies for portals like Yahoo and Excite.
Meanwhile, in the wake of Yahoo's spending spree, a lot of the industry's second-tier players are
starting to look more attractive and not quite so expensive. Of course, everything's relative.
To wit: Another recent entrant into the public domain, MiningCo.com (MINE), has become the Web's
29th most-trafficked Web property thanks in part to 600 real Web guides. Some of it seems
superfluous, but if Web users are truly in search of a human touch, then MiningCo's customers could be
gold for a larger portal. (Market cap = $1.05 billion) Internet service provider MindSpring (MSPG)
provides service to more than a million customers. It's not hard to figure why that would be valuable to
a company struggling to keep its installed base growing. (Market cap = $3.1 billion) EarthWeb's
(EWBX) focus on technophiles cuts into the core of the Web community. And the company says t hat
it will limit its reliance on advertising revenue over the next three to five years. With a stable recurring
revenue base and an entry into the information-technology market, EarthWeb would become an
extremely value partner for an e-commerce player.
(Market cap = $511.8 million) Yahoo says it doesn't want to tie itself to any access providers, but
Excite's proposed union with At Home signals the value of linking content and high-speed delivery.
Covad Communications (COVD) recently introduced a n ationwide digital subscriber-line service that
could give broadband access to millions of home and office Internet users. (Market cap = $816 million)
On the other hand, Yahoo broke the bank (or so it seemed at the time) for GeoCities. With a meager
market cap of $1.1 billion, Xoom.com (XMCM) now looks like a bargain. Who knows what all this
community-building means, but according to Media Metrix, Xoom has the 12th most-traveled suite of
sites on the Web.
Of course, many of these companies qualify f or consideration because they exist, as much as for
anything else. As Levy says, everybody's a target.
And as long as the acquirers are rising along with the acquirees, why not pay for the cream of the
crop? Yahoo, Amazon.com (AMZN) and AOL might be expensive, but they also seem to be working
to justify their valuations quite nicely. Soaring market capitalizations will only make them more powerful,
more likely to win when the game plays out.
Investors playing small software targets in the late 80s would have made out all right as Microsoft built
itself into the industry's undisputed king. But they wouldn't have done badly playing Microsoft either.
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