October 9, 1998
Will a ZDNet Tracking Stock
Really Unlock Hidden Value?
By NICK WINGFIELD
THE WALL STREET JOURNAL INTERACTIVE EDITION
SAN FRANCISCO -- Beleaguered Ziff-Davis thinks it has found the cure to
its stock-market woes: the Internet spinoff.
But a chorus of doubters are questioning whether Internet spinoffs will
accomplish what they are designed to achieve: namely, to "unlock the value"
of Internet operations buried within a much larger business.
More and more companies founded on
old-world business models -- be it traditional
bricks-and-mortar retailing or print publishing
-- are opting to break out their cyberspace
operations into separate stocks in an attempt to
capture lofty Internet market valuations.
Barnes & Noble was set to hold an initial public
offering for its barnesandnoble.com unit, a plan
that was put on hold after a $200 million
investment this week from Bertelsmann. And on
Thursday, Ziff-Davis became the latest to
announce a grab for the Internet gold with a
plan to sell 20% of its ZDNet online business to
the public through a new tracking stock.
CNET Envy
But the plans from Barnes & Noble and Ziff
haven't impressed some analysts.
"I think we're seeing signs of desperation," said
Keith Benjamin, an analyst at BancBoston
Robertson Stephens. The Ziff plan to float a
tracking stock for ZDNet, Mr. Benjamin added,
"would have been much more effective a year ago when CNET was starting to
hit its stride."
In fact, analysts believe Ziff's strategy was largely motivated by the
stock-market success of CNET, its most similar competitor in the online
technology-news market. That San Francisco new-media firm held its IPO in
1996 and, although its shares have buzzed up and down wildly, now sits on a
$39 share price and a market cap of roughly $630 million.
But shares of Ziff, which went public earlier this year at $15.50 a share, have
tanked. On Friday, its shares fell 5/16 to close at 3 15/16, leaving it with a
mere $394 million market value -- despite having about 20 times as much
revenue as the younger CNET.
Bad to Worse
Ziff's drop accelerated Thursday after it said it would miss fourth-quarter
estimates, take a pretax restructuring charge of between $50 million and $60
million in the fourth quarter, close several computer magazines and lay off
10% of its work force.
Colossal valuations for pure Net companies are nothing new, and Ziff's slump
reflects concerns over its core print business. Still, the disparity between
CNET and Ziff's market value is striking.
Revenue for Ziff's second quarter was $276.5 million, while operating income
was $21.4 million. (Analysts tend to judge traditional media companies by
EBITDA, or earnings before interest, taxes, depreciation and amortization,
which was $63.4 million in the second quarter.)
CNET's business, on the other hand, is still relatively dinky. In the second
quarter, the company had operating income of $138,000, or one cent a diluted
share, on revenues of $13.1 million. What no doubt burns Ziff executives is
that their Internet operations alone have nearly matched -- and in fact even
exceeded -- CNET's financial performance and the popularity of its Web sites,
but Ziff's stock is still in the tank. In the second quarter, ZDNet broke even
on revenue of $12.9 million; Ziff executives have told analysts that the
business is now profitable, though a company spokesman declined to comment
because of "quiet period" restrictions. According to August measurements by
Media Metrix, ZDNet received 7.08 million visitors, while CNET received
7.015 million.
A Decent Shot?
Some analysts believe Ziff has a shot at getting a decent valuation for ZDNet
when it spins it off as a tracking stock. (Ziff hasn't filed a registration
statement for the shares.)
"It gives them a chance to say, 'We're worth more, our traffic numbers are
just as good if not better [than CNET's], we have at least as good a reputation
in the industry,' " said Daniel King, a research analyst at LaSalle Street
Securities Inc. who tracks Ziff.
Mr. King adds that a rich Internet-style valuation could give Ziff a "new
currency to use for mergers and acquisitions," something that could be critical
to keep pace with its competitors. ZDNet stock options might also help Ziff
attract and retain key employees. (Ziff slashed the exercise price for its
employee options to $6 this week to reflect its sinking stock price.)
But other analysts said the record of previous cyberspace spinoffs isn't
encouraging. David Simons, managing director at New York stock-research
firm Digital Video Investments, said one dreary precedent was the
less-than-spectacular IPO held by CompuServe, the venerable online service
spun off by parent company H&R Block in 1996. "The whole thing was a
debacle," Mr. Simons said. "The thing went public at $30 and made a little
pop and never looked up from there." Of course, CompuServe had serious
competitive challenges that helped clobber its stock: America Online, which
later acquired much of the company, was beating CompuServe senseless in the
race for online subscribers.
Mr. Simons added that the close ties that
remained between CompuServe and its parent
company even after the IPO didn't help things.
While CompuServe was being overwhelmed
by the marketing efforts of AOL, Mr. Simons
said H&R Block held back on a all-out
counterattack. "Management at the parent still
has incentive to keep a lid on expenses," he
said.
In another case, software merchant Egghead didn't simply spin its Internet
business off earlier this year -- it completely shut down its traditional
store-retailing operations in favor of online selling. The shares of the
re-christened Egghead.com initially spiked on investor enthusiasm for the
decision, but have since fallen to 5 1/4, well off its 52-week high of 29 1/8.
"We've never seen one of these work," Mr. Benjamin said of Internet
spinoffs. |
