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Technology Stocks : Netscape -- Giant Killer or Flash in the Pan? -- Ignore unavailable to you. Want to Upgrade?

To: mr.bill who wrote (2369)	2/6/1998 8:27:00 PM
From: Gary Jacob	Read Replies (1) \| Respond to of 4903

A fools point of view: FOOL ON THE HILL An Investment Opinion by Jim Surowiecki The Netscape Suitors Netscape Communications (Nasdaq:NSCP - news) jumped nearly 25% earlier this week as rumors circulated that the Mountain View, California maker of enterprise software and browsers for the World Wide Web is shopping itself around. Netscape's market capitalization was boosted $400 million as some pretty big names in the software world were mentioned as possible acquirers. This isn't a penny stock with "tons of potential" -- it's a serious software firm that has had difficulties achieving its goals over the last year as it has moved to combine all the disparate software companies it has acquired to build the next generation of enterprise software products. The rumors might be total nonsense, but the rationale behind them makes sense. Sensibility is the backbone of good rumors or lies. Those rumors were first published in a story in Thursday's Wall Street Journal, but they had been floating around the Street the day before, when Netscape's stock jumped 10% before tacking on another 2 1/2 points yesterday. The Journal piece suggested that Netscape had been talking to Sun Microsystems (Nasdaq:SUNW - news) , Oracle (Nasdaq:ORCL - news) , IBM (NYSE:IBM - news) , and America Online (NYSE:AOL - news) , and that the struggling firm was interested in selling all or part of itself. What wasn't made clear in any of the press coverage, though, was what part of itself Netscape was interested in selling, nor were any numbers mentioned, though everyone seemed to agree that the dramatic drop in Netscape's stock price -- from a high of $80 last year to $17 1/2 just a few days ago -- had made an acquisition more feasible. Nonetheless, the possibility of a deal being consummated anytime soon seems very unlikely, which means that buying Netscape stock in anticipation of a big payoff is a feat that individual investors should probably leave to arbitrageurs. That's not just because mergers of any stripe are difficult to arrange, but also because Netscape's business fits differently with each of the companies mentioned in the Journal article. For Sun Microsystems, Netscape would extend Sun's intranet and Internet strengths by adding applications software. The combination of Netscape's enterprise software and Sun's workstation and server business would help Sun become the kind of one-stop-shopping company that would allow it to compete more effectively against Microsoft's (Nasdaq:MSFT - news) Windows NT-driven inroads into the corporate market. Similarly, the combination of Netscape's intranet software and Oracle's database software also offers intriguing possibilities. But the fact that both Oracle and Netscape turned in very weak performances in their last quarters and that Oracle's diversions into enterprises outside its core business -- like network computers -- have investors concerned means that any Oracle-Netscape deal could create more problems than it would solve. Still, though, the thought of combining the people with the most popular client for web access with the people that run the huge databases on the server side is intriguing. IBM's name, one suspects, was included in the story because any time any technology company is in play IBM is mentioned, simply as a result of Big Blue's size. As for America Online, the acquisition of Netscape's browser business would strengthen AOL's Web presence and presumably enhance its appeal to advertisers, but in bottom-line terms it's hard to see how owning Netscape's browser would mark a dramatic improvement from the current deals America Online has with both Netscape and Microsoft. (Entering the intranet software business is something AOL should think hard about before doing, considering that's a major step outside its consumer focus and competencies and considering how AOL could use some help in making its network thoroughly robust and fault-tolerant.) The most interesting partner for Netscape is the last member of the unofficial "We Hate Microsoft" club, namely Novell (Nasdaq:NOVL - news) , which pioneered the development of corporate networking software and still retains a huge installed base of customers. Novell is sitting on a pile of cash, but has been struggling under new CEO Eric Schmidt (formerly of Sun) to re-establish credibility with corporate customers and to rebuild a brand name that was seriously marred by the company's disastrous acquisition of WordPerfect. Netscape and Novell have already partnered on Novonyx, a project designed to adapt Netscape's software to Novell's operating system, and a Novell-Netscape merger might provide the kinds of synergies that companies dream about but rarely realize. On the other hand, no one has mentioned Novell as a realistic suitor, probably because the company's stock price is so depressed. What all of these rumors point to, though, is the fundamental paradox of Netscape's current situation, which is that the business that has made Netscape a recognizable name and created its brand identity is not a business that it can rely on to generate substantial revenues moving forward. In part because Microsoft has been so successful at making Internet Explorer a technologically suitable alternative to Netscape, and in part because the Web browser business model was always somewhat sketchy, Netscape's browser -- which is, again, the only reason anyone paid attention to Netscape -- has become almost a loss leader, something Netscape does in order to make its corporate software business credible. Obviously the potential market for intranet, networking, and enterprise software is huge, and even the Web-server market has a substantial upside. But the cold reality of Netscape's recent performance is that at a time when other software -- and even hardware -- companies are seeing sharp rises in revenue and even sharper rises in earnings, Netscape is seeing minuscule growth in revenue -- revenues rose just $8 million in the last quarter, less than 7% -- and precipitous drops in earnings. That makes investors' reactions to the news of a possible takeover painfully rational, since what the numbers suggest is that Netscape's greatest hope of creating shareholder value may very well be to find a buyer willing to pay a premium for its stock. Why any buyer would be willing to do that, though, is another question entirely.