Who wants to buy Excite?

The pending liquidation of broadband Internet company Excite@Home puts its well-trafficked Excite.com Web portal up for grabs, but even at a fire sale price the site could have trouble attracting a buyer.

As a "second tier" player in a market increasingly dominated by AOL Time Warner's America Online, Microsoft's MSN and Yahoo, Excite.com was in trouble long before its parent filed for bankruptcy protection last week.

Now it faces potentially insurmountable obstacles: In its bankruptcy filing two weeks ago, Excite@Home said it had "initiated a wind down of Excite.com and other portions of the Excite Media Network," a sign that the company is not holding out high hopes for a significant sale price.

Analysts said competitors--which might normally be considered among the most likely potential buyers--may now decide that it is easier to simply allow Excite to die a slow death than step in with an offer.

"This is now a waltz of elephants...Excite ain't an elephant," wrote Merrill Lynch analyst Henry Blodget in an e-mail exchange. "Over time, I expect that their traffic and registered users will gradually migrate to one of the big three."

Microsoft, which operates the MSN Web properties, has been mentioned as one of the potential buyers of Excite. A representative of the software giant declined to comment.

Like other portals, Excite was once valued for its ability to bring in "eyeballs," and by that benchmark it has continued to perform well, ranking as the seventh most visited site on the Web for the month of August with 28.7 million unique visitors, according to online research company Jupiter Media Metrix.

While those numbers were worthy of a billion-dollar market capitalization a few years ago, investors now want to know when and how such traffic will produce profits. In this case, the Excite portal accounted for most of Excite@Home's $65 million in losses last quarter.

Standing tall Despite its financial woes, Excite.com has continued to draw U.S. Web users to its portal and services, ranking among the top 10 most-visited sites in August. Rank Top properties Unique visitors (000) 1 AOL Time Warner network* 78,543 2 MSN-Microsoft sites* 67,402 3 Yahoo* 64,683 4 Terra Lycos* 38,818 5 X10.com 34,622 6 About/Primedia* 29,428 7 Excite network* 28,679 8 eBay* 24,900 9 Vivendi-Universal sites* 23,001 10 Amazon.com* 22,950 * represents a group of commonly owned and/or branded domain names Source: Jupiter Media Metrix

Excite@Home did not respond to calls seeking comment. But the company's actions indicate that its priority is to salvage as much of its high-speed access business as possible, even at the expense of its long-suffering Web portal.

When the company announced last month it would lay off 500 employees, it said the lion's share of the cuts would come from Excite, and from shuttering its MatchLogic interactive marketing subsidiary. Most of Excite@Home's remaining 1,350 employees are involved in the company's high-speed access business.

While day-to-day operations have not been suspended, they have been curtailed. News headlines continue to be posted to the site and services such as ticker searches and movie listings are functioning. But some features, such as a horoscope service, have already shut down.

More tellingly, the site has all but ceased serving third-party banner advertisements. In addition, as of Friday it had suspended new classified ad sales, citing "server maintenance" in a notice on the site.

"Laying off most of the Excite.com employees involved in developing content on the site, in my view, may diminish the value of the asset," said Drake Johnstone, an analyst at investment bank Davenport & Company.

Excite homeless?
@Home paid $7.2 billion for Excite in 1999 as part of an ambitious plan to match AOL's highly successful strategy of marrying online access with content. Executives had hoped that tying together broadband Internet access with its own start page to help guide people through the Web could add more loyalty and an additional advertising revenue stream.

What went wrong for Excite@Home Cynthia Brumfield, principal analyst, Broadband Intelligence August 31, 2001

At the time of the negotiations between the companies in 1998, Excite was also being courted by Microsoft and Yahoo, according to sources familiar with the discussions. Excite and Yahoo came steps away from shaking hands on a deal valued at about $5.5 billion to $6 billion, but @Home came in the last minute with a better offer.

After the companies consummated their marriage, the new entity enjoyed a lengthy honeymoon period. In 1999, Excite@Home's media and advertising dollars, largely comprised of advertisements on Excite, reached $197 million, or 58 percent of the company's overall revenues. The next year, media and advertising revenue skyrocketed to $308 million, riding on the residue of the Internet boom.

However, in April of 2000, the Internet stock bubble burst, which then wiped out venture capital funding almost overnight and caused start-ups supplying online advertising dollars to fold.

Within a few months, the ripple effect of the stock collapse began hitting industry giants. Yahoo, which had anticipated generating $1.2 billion in revenue for 2001 has since twice reduced estimates and now expects to reach between $700 million and $750 million. Some analysts expect Yahoo to reduce estimates again when it reports earnings on October 10.

Meanwhile, AOL, which acquired Time Warner in January this year, began showing signs that it would also fall short of financial forecasts. The company two weeks ago said it would not meet its aggressive year-end financial expectations in part due to the terrorist attacks that destroyed the World Trade Center.

Media companies at the time lost significant advertising dollars after running ad-free coverage of the attacks. Media companies also were unable to forecast how 2002 would turn out, given the difficulty in spotting when advertising will revitalize.

Given the dismal outlook for even the biggest of traditional media companies, the outlook for second-tier Web portals like Excite remains pessimistic. In January this year, Excite@Home wrote-off $4.6 billion in intangible assets from the decline in value of its two most expensive acquisitions: Excite.com and online greeting card site Blue Mountain Arts.

In the fiscal quarter that ended June 30 this year, Excite@Home's media and advertising revenue dropped 62 percent from the previous year to $28.6 million. Advertising only accounted for 21 percent of the company's overall revenue. Looking at the first half of 2001, advertising declined 51 percent from the previous year to $73.6 million.

"With revenue declining at such a huge amount, it would be hard to get someone interested in it," said Drake Johnstone, an analyst at investment bank Davenport & Company. "Revenue hasn't stabilized, it keeps on declining."

One issue compounding the situation is the amount of over $1 billion in debt for the entire company. Most of the debt is in the form of bonds that are not due for at least five years, but there remains lingering uncertainty about who will incur the debt in the event of an acquisition.

There's no question Excite continues to be a hard sell. Finding the right deal will depend on the needs of the buyer, and some analysts say Excite still has something people may want: a database of consumer information. That in itself could be worth something.

"They don't have any defensible proprietary content that anybody really needs," said Patrick Keane, an analyst at online research company Jupiter Media Metrix. "They have a huge database of names, and a direct marketer might want to purchase that."