As reported earlier, Excite@Home's board voted in favor of the tracking stock Wednesday, capping more than six months of negotiations concerning the sometimes confusing strategic direction of the Redwood City, Calif.-based company. The company's cable industry partners reached consensus first at an earlier meeting about three weeks ago but it wasn't formalized until last week, executives said.
The new tracking stock, expected to be issued as early as August, will create an independent board of directors that will oversee the Excite.com Web portal, the company's high-speed (or "broadband") portal site, and advertising and targeted demographic service properties such as MatchLogic.
The media assets will also keep separate financial books, while remaining part of the larger Excite@Home parent company.
"This will give the media part of our business the ability to operate independently," said Excite@Home chief executive Tom Jermoluk.
"Now when the media side of the company wants to do things that might in any way impact the subscriber side, it has a separate financial vehicle and its own equity. That is the degree of flexibility that we've gained here," he said.
Under a unique governance structure, the nation's largest cable operators are both Excite@Home stakeholders and customers of its service. But the cable companies' equity stakes are diluted when Excite@Home uses its stock as currency to acquire other companies, creating a curious position for the cable industry executives who dominate Excite@Home's current board of directors. AT&T is the largest shareholder in Excite@Home with Cox Communications and Comcast not far behind.
In addition, AT&T has publicly expressed discomfort with playing in the content business and announced in September that it was considering possible business deals involving Excite@Home.
As a result there has been speculation that Excite@Home might sell the Excite.com Web portal only a few months after buying the company. Excite@Home has since made other content-related acquisitions, including its purchase of Blue Mountain Arts last month.
By issuing a tracking stock, the company is effectively announcing its intent to keep the media portion of its business. Under federal tax laws it is impractical to sell a tracking stock business for at least three years, executives said.
"This is the decision for quite some time," Jermoluk said.
Excite@Home's cable partners appear pleased with the decision.
"We are in total alignment with Excite@Home on this transaction," AT&T chief executive C. Michael Armstrong said in a statement. "This structure will allow Excite@Home to aggressively build its media business independently while working with AT&T and its other cable partners to drive the deployment of broadband services to consumers."
Executives from Cox and Comcast also issued statements supporting the decision.
Those cable companies use Excite@Home's technology and national network to deliver fast Net access to consumers over local cable TV networks. The so-called broadband industry, including competing digital subscriber lines offered by phone companies, is growing at a rapid pace and is netting attractive profit margins for cable operators, which have seen their core video business infiltrated by satellite TV providers.
Excite@Home is approaching 1 million customers, and expects to have about 8 million users and revenue of $2 billion by 2002. Likewise, AT&T has said it intends to have 1 million cable modem users by the end of next year.
Still, the ongoing uncertainty about its strategic direction, coupled with potential clouds on the regulatory horizon, have led to a languishing stock price during the second half of the year. Executives hope the move will clarify the company's intentions and boost investors' confidence.
"Now we feel strongly the company should be measured on the success of the employees in executing," Jermoluk said.
"It allows us to go back to running the company," Jermoluk said. "Adding subscribers and scaling the business, that's what I want to turn my attention to as opposed to going off and having more and more discussions about the strategic alignment of the company."
Excite@Home executives expect to file a proxy statement with federal regulators in the spring that will detail the size and makeup of the new board, the proposed new ticker symbol and whether each half of the business will have a new name.
The new board will include minority representation by Excite@Home's current stakeholders, but the majority of the new media board will consist of independent directors, Jermoluk said. Each board member will have equal voting power on the media board, unlike the current Excite@Home governance structure under which AT&T holds more sway than others.
Investors will receive shares of the new tracking stock on a one-to-one basis.
The media business will continue to share an executive management and business development team with the high-speed subscriber network side of the company, Jermoluk said.
"We plan on running it the way it is. We'll take the relevant decisions to the appropriate board," Jermoluk said.
A recent shareholder lawsuit alleged that Excite@Home's existing governance structure was stifling the company's growth and suggested an entirely independent board of directors should be installed, but Jermoluk said the suit had nothing to do with the tracking stock.
The new tracking stock will not affect the exclusive agreements under which the major cable partners are forbidden from offering a similar Net service from a competing ISP until at least 2002, executives said. And, although the cable operators are free to sell their stake in the new media tracking stock, their control of the network side of the business is linked to the retention of a certain amount of equity in the media business, Jermoluk said.
The tracking stock is likely to clear the air of any uncertainty over whether the company will sell the Excite portal, but Excite@Home still faces a federal court decision over whether unaffiliated ISPs should be allowed equal, or "open," access to the cable operators' networks. And, although AT&T's Armstrong reiterated in a statement that Ma Bell intends to continue working with Excite@Home after 2002, AT&T has said it expects to offer content from other ISPs in addition to Excite@Home in the future.