From TheStreet.com,
What a broadcast.com Deal Would Mean for Yahoo!
By Spencer E. Ante
Staff Reporter
SAN FRANCISCO -- If Yahoo! (YHOO:Nasdaq) buys broadcast.com (BCST:Nasdaq)
as reports indicate, the deal makes sense in the long term, analysts say.
Short-term, it could trigger a bidding war for broadcast.com and dilute
Yahoo!'s earnings.
Speculation of the acquisition surfaced in Business Week Online last week
and intensified Wednesday afternoon as CNBC reported a deal was "imminent."
CNBC said the deal has been approved by the boards of both Yahoo! and
broadcast.com. Shareholders are expected to receive 0.77 share of Yahoo!
for each share of broadcast.com, valuing the deal at $5.7 billion.
"It makes perfect sense," says Peggy Ledvina, an analyst with Dain
Rauscher. "If the deal goes through, it gives them the streaming audio and
video capabilities that they need to become the new-media network of the
Internet."
Yahoo! declined to confirm the rumors. Both companies' stocks have been
halted for news pending, and Yahoo! has scheduled a conference call for
Thursday at 8:30 a.m. EST.
Mike Wallace, an analyst with Warburg Dillon Read, agreed that
broadcast.com's video and audio offerings would be a welcome addition to
Yahoo!'s text-centric directory service. "Yahoo! is the only major company
that doesn't have a high-speed video play," he says. "And now they have
it."
The deal would put Yahoo! in a position to lead the market for streaming
media, analysts say. "If you're a content provider and you're looking for
distribution, it makes sense to go with all those Yahoo! eyeballs," Wallace
says.
broadcast.com ranked as the 14th-most visited site on the Web in February,
with nearly 9 million unique visitors both at home and work, according to
Media Metrix. Yahoo! ranked second with a tad more than 31 million unique
visitors, behind top dog AOL (AOL:NYSE). Even with broadcast.com's visitors
added in, Yahoo! would remain second to AOL.
Another synergy of the deal is that Yahoo! could cross-sell broadcast.com's
Webcasting services. Dain Rauscher's Ledvina said that the deal follows
through on comments that Yahoo! made at a recent conference call in which
the Santa Clara, Calif.-based company expressed a desire to expand its
service offering. "In addition to the underlying technology, Yahoo! will
get a service that they can sell on their site," says Ledvina, who adds
that broadcast.com makes the bulk of its revenue through providing
Webcasting and hosting services to companies.
However, analysts cautioned that the deal could dilute Yahoo!'s earnings in
the short term. In contrast to its pending merger with GeoCities
(GCTY:Nasdaq), Yahoo! will be more hard-pressed to squeeze out any
efficiencies in the broadcast.com acquisition, analysts say.
One redundant area: Yahoo! could cut broadcast.com's marketing costs, which
accounted for 25% of the company's 1998 expenses, says BancBoston Robertson
Stephens analyst Keith Benjamin. Under the terms of the GeoCities deal,
Yahoo! will exchange about 10.6 million of its shares for the 31.4 million
common shares of GeoCities. In addition, Yahoo! will convert about 8.9
million GeoCities stock options into about 3 million Yahoo! stock options.
"I don't know if they're gonna be able to get the same sort of synergies as
they did with GeoCities," says Wallace.
In a March 23 research bulletin, Merrill Lynch analyst Henry Blodget
cautioned that a broadcast.com deal would not necessarily be a near-term
positive for Yahoo! investors. "Although Yahoo! believes the GeoCities
merger, alone, will be neutral to earnings, we believe it will be more
difficult (but not impossible) for the company to acquire both GeoCities
and BCST and still have them be neutral to earnings," Blodget wrote.
broadcast.com lost about $5.2 million in the fourth quarter, while
GeoCities lost $8.4 million. For its part, Yahoo! reported fourth-quarter
net income of $18.5 million, or 16 cents per share.
Some analysts warned that the deal could spark a costly bidding contest for
broadcast.com, which is the only large, high-profile streaming-media
company besides RealNetworks (RNWK:Nasdaq). "We believe that BCST would
also be an attractive acquisition candidate for other major players," wrote
Blodget. "We consider it possible that the news of the YHOO/BCST talks
could trigger a bidding contest. This would make it more difficult for this
acquisition to be neutral or accretive to earnings."
The Yahoo! deal has ratcheted up speculation that RealNetworks would make a
juicy takeover target, but Warburg's Wallace downplayed the notion. "I
don't know if it makes sense for a portal to buy them," he says. "Because
if they did, other portals would be less likely to buy Real's server
technology."
Some, like Ryan Jacob of the $210 million Internet fund, say a Yahoo!
buyout was just what broadcast.com needed. "If broadcast.com had to go it
alone, they would've had a difficult time," says Jacob. "broadcast would
have seen more competition. In our opinion, once the audience sizes get
larger, they wouldn't have free access to content anymore."
Yahoo! was Jacob's second-largest holding as of year-end, according to
Morningstar, but the fund has shunned broadcast.com. Still, he says, "The
fact of the matter is that broadcast.com still has significant reach and I
don't think it's a really bad acquisition for Yahoo!. It's not gonna
materially hurt them, even if the transaction turns out badly."
Hey, what's $5 billion between friends?
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