More interesting commentary on recent mergers, etc...
INTERNET SECTOR REPORT
July 16, 1999
Connecting the Dot.coms
By Peter D. Henig
Contributing Editor, MicroCap1000.com
Don't look now but a nice little chunk of the Web just got gobbled up and swallowed whole as no fewer than four major Internet acquisitions took place this week.
Excite@Home announced an agreement to acquire iMALL (IMAL), a provider of web hosting and e-commerce services to businesses, for $425 million in stock. CDnow (CDNW) announced a merger with Columbia House to form an entity to be owned jointly by Sony, Time Warner and CDnow shareholders. Computer hardware and software retailer, Egghead (EGGS), announced that it would merge with online auction site, Onsale. And Internet advertising leader, DoubleClick (DCLK), reported that it would acquire its number one competitor,NetGravity (NETG), in a deal valued at $530 million in cash and stock.
That's a whole lot of Net to digest in one sitting and a whole lot of news for investors to sit back and chew on. And although analysts have seen Internet consolidation coming for months, the fact that the pace has accelerated recently has some market watchers seeing trends appear which may or may not make good economic sense for merger participants.
Show me the logic
"We remain concerned that the new [Onsale-Egghead] company does not seem to have enough combined brand recognition or an economic formula to deal with aggressive price competition," commented Keith Benjamin, Internet analyst with BancBoston Robertson Stephens after the Onsale announcement.
Likewise, analysts also doubt the logic of DoubleClick's acquisition of NetGravity -- its second large deal after recently buying Web marketing firm Abacus for $1 billion. "The keys to making any of these deals work is culture, geography, and systems," says Lynn Heublein, Chief Operating Officer for Mpath, a community site built around audio and video streaming which just recently went public. "And ultimately, integration of these three things is the key."
With different technology platforms, the integration of DoubleClick and NetGravity is not a slam dunk, even though there are obvious business synergies between DoubleClick's advertising client base, NetGravity's software, and Abacus target marketing capabilities.
As for the CDNow acquisition, Mr. Benjamin feels it may be too little too late for the music e-tailer which has been suffering at the hands of the Web's own 800-pound gorilla, Amazon.com. "While we believe the combination with Columbia House is positive, we still believe its competitive eTailing position is weak relative to competitors', like Amazon, which can leverage more marketing muscle."
Finding religion
The Sony-Columbia House deal brings up an interesting issue, as well, that of the big offline companies finally becoming smart enough ? -- or is it scared enough ? -- to aggressively begin building their online presence.
"The big dumb companies are finally realizing they need to become big dumb dot.com companies," says Henry Jackson, managing director with investment banking boutique, Peter J. Solomon & Co.
Andrea Williams, Internet guru with E*Trade's new E*Offerings agrees: "It's throw in the towel, wave the white flag, if you can't beat them join them time," says Ms. Williams. "But you need the dot.com companies calling the shots, to be agile, understand the Web, and have the currency to grow."
It's the Internet currency part of the equation which has had the offline companies hesitant about buying into online brand names and their lofty valuations. But that too may change, now that the bricks-and-mortar world have figured out they can have their own Internet wampum simply by spinning out their Web enterprises into need little trading packages.
With Disney's recent announcement that it would purchase the remaining 57% of InfoSeek and fold it into the Go Network, the Mickey kingdom also announced that it would likely issue a tracking stock or spin out a separate company to fund its online initiatives. This move follows similar announcements by NBC, Microsoft and possibly even CBS that they, too, would pursue their online models with a whole new rack of tradable currency.
Adding it all up, analysts say the recent M&A activity is just a further indication that there will be just one or two players to emerge as winners in each of the Internet categories, and that the separation between winners and losers could happening sooner than we thought possible.
"It's the old story of a race to get bigger between competitors in each individual space," says Ryan Jacob, chairman of Jacob Asset Management and former portfolio manager for The Internet Fund. "But it's interesting that we're seeing some of the weaker players accept purchase prices at lower market prices, which leads me to believe that some of the leaders are starting to pull away in terms of market power."
So can we expect even more buyouts in the dot.com world?
"Just look in the rear view mirror over the last six months," says one top Internet banker. "And it's going to be just like that and more."
|
