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Net merger mania continues

The Internet buyout feeding frenzy is in full swing, with potential suitors looking for properties that can fill holes in their strategies.

The latest domino has fallen, and more are sure to follow.

Today's acquisition of Web home page builder GeoCities by Yahoo has further fueled speculation that this latest spate of mergers and acquisitions is not slowing down.

Within the past few months, the Internet has witnessed a snowballing trend toward consolidation. Just last week, @Home announced it would acquire Excite for $6.7 billion in stock, which essentially adds a content and commerce interface to its broadband network. In November, America Online moved to acquire Netscape Communications for $4.2 billion in stock.

In addition, Web portal Lycos has acquired a number of smaller companies over the course of the year, including home page builder Tripod in February 1998; Web information service WhoWhere in August; and Wired Digital in October. All three involved stock swaps.

And now that the Internet industry is embroiled in a buyout feeding frenzy, analysts said potential suitors are looking for properties that can fill holes in their strategies to become stronger Internet players.

"Anyone's a takeover candidate," said William Blair analyst Abhishek Gami.

Up next: Lycos?
As for the next major acquisition or investment target? Deutsche Bank analyst Jennifer Klein said the answer is simple.

"It's easy--Lycos," she speculated. "They are the last stand-alone portal or community asset that doesn't have a big brother."

Rumors have been rife since the @Home-Excite deal about potential suitors looking into Lycos--with Microsoft and Time Warner as the top candidates. A day after the Excite acquisition, a Lycos executive said the company was interested in selling a 20 percent stake in the company to a media company.

However, just a few days later, Lycos chief executive Bob Davis told conference attendees that his company would remain independent.

Klein added that if Lycos were to become the last sister to get married, it would be to a media company in a relationship similar to the Disney-Infoseek or NBC-Snap relationships.

"I don't know that they would necessarily go for a 100 percent takeover, but more along the lines of an Infoseek-Disney partnership," she said. Disney owns a 43 percent stake in Infoseek.

The GeoCities acquisition also opens up the landscape to a new list of possible acquisition targets. Many are speculating that the attraction to online communities as takeover targets will extend to Xoom and TheGlobe. Both companies use home page building and chat forums to gather and retain members.

Other potential candidates include e-commerce or auction sites such as eBay, uBid, Onsale, or CDnow.

Gami speculated that one example of a possible fit would be Amazon and download site AudioHighway.

"Regardless of valuation, companies are now [reevaluating their strategies] to make sure they can get what they can get before they're gone," he said.

Come one, come all
The suitors are the usual suspects ranging from offline media companies such as Time Warner, Sony, and CBS to telecommunications companies such as AT&T, MCI/WorldCom, Sprint, and the RBOCs [regional Bell operating companies]. And then there is always Microsoft, which is consistently rumored to be talking to Web properties about potential acquisitions or long-term investments.

"What you've seen is, the billion-dollar deals have all been done by Internet companies themselves," said David Simons, managing director of Digital Video Investments. "These companies have this highly valued script which enables them to buy these Internet companies. The acquirers have enough stock of great enough value that they can buy these things without having a dilutitive effect on their earnings."

In effect, the stock phenomenon among Web companies ranging from highly trafficked portals like Yahoo to e-commerce firms such as Amazon.com has given these companies the ability to do deals that their cash flow would not allow. Amazon, for instance, which has acquired Junglee and PlanetAll recently, is still in the red. The firm reported a loss of $17.8 million or 14 cents per share in its latest quarterly earnings report.

By comparison, traditional media companies such as NBC and Disney have made significant investments in the online space, but those deals have been relatively small compared to the multibillion-dollar deals being wielded by the Net players.

"Major media companies haven't gone out spending billions," Simons added. "They have been doing strategic deals that do not deal with that much stock. The reality is the major media companies, in terms of what Wall Street demands of them, cannot afford to do these deals. Wall Street values them and measures them on a totally different [scale] than these Internet companies."

Time to "suck it up"
Nevertheless, Gami said that offline companies waiting in the sidelines will eventually have to take action, because building is more difficult than it seems. Observers say the television networks, for example, need to embrace new media aggressively or die.

"I think that the best offline companies will suck it up, do the joint ventures, do the acquisitions, and do things bigger and better for the future," he said.

Although the valuations for many Internet companies seem to be out of this world, investors are banking on what could be unheard-of power and worth in the media space if computers and television continue to converge, for example. Some analysts say that although the investment in these firms is great, the cost and time involved for the companies to develop the infrastructure makes acquiring a Web property seem less daunting. Plus, who knows how much the hot Web properties will cost going forward.

"It creates a sense of urgency that even though the prices are high in relation to the current earnings, the overall amount of investment that a traditional media company will have to make to buy tomorrow's leader tomorrow will be even higher," said Phil Leigh, an Internet analyst at Raymond James. "It might become beyond their ability.

"They are also becoming aware that the Internet is likely to become the dominant form of electronic media and there's little choice but to jump in at some point," he added. "It's almost like this is the ship they need to get on, otherwise the best they can hope for is a lifeboat on their existing business."

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