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Analysts ponder Amazon-Wal-Mart possibilities shares surged 19 percent Monday as investors speculated that the e-tailer could form an alliance with the brick-and-mortar retail giant Wal-Mart.

Britain's Sunday Times reported that Amazon (Nasdaq: AMZN) is in talks with Wal-Mart (NYSE: WMT) to create an alliance in which Amazon would handle Wal-Mart's online strategy. The deal would be similar to the one Amazon now has with Toys "R" Us (Nasdaq: TOYS).

Even though the companies didn't confirm the talks, it didn't stop analysts from pondering the possibilities. A few analysts said a partnership between Amazon and Wal-Mart partnership could be a cure-all for the e-tailer's woes.

Amazon shares were up $1.94 to $11.94, still far off their 52-week high of $75.25. The once-darling of the Internet scene has come under scrutiny with other dot-coms lately over its losses and cash position, and even gets rare "sell" ratings.

The relationship would be similar to that between Amazon and Toys "R" Us in that Amazon would become Wal-Mart's e-commerce provider, providing back-end Web infrastructure. Amazon would likely be paid for its logistics, boost its balance sheet and get a cut of goods sold. Amazon would also have kiosks in Wal-Mart stores.

For Amazon, which has had difficulty expanding its business efficiently, the deal could also allow it to use languishing distribution capacity. Even with the closure of its Georgia distribution center in the first quarter, Amazon will use less than 40 percent of its distribution capacity in 2001, according to Bear Stearns analyst Jeffrey Fieler.

For Wal-Mart, up 33 cents a share to $49.25, the deal would it to continue to focus on what it knows and does exceptionally well--store-based retailing-- while "outsourcing" its e-commerce arm to Amazon. The company has redesigned its site twice in the past year and just last week cut 10 percent of its 250-person workforce to conserve cash.

"If the news turns out to be true, it would clearly be beneficial to Amazon on many fronts, and we would reconsider our cautious stance," said SG Cowen analyst Scott Reamer, who rates Amazon "neutral." The specific benefits of the deal seem to answer the concerns of Amazon bears, he noted: "balance sheet liquidity, product and customer access, and revenue growth."

"We suspect that there will be short covering this a.m., which could push the stock up aggressively," Reamer said. Short sellers are traders that place bets that a stock will fall.

"This suggests that Amazon might be worth more than 'just another unprofitable retailer,' " said Merrill Lynch analyst Henry Blodget, who rated the stock "accumulate."

The deal will "move the market's focus from Amazon's potential financial difficulties to 'Amazon and Wal-Mart would make a powerful combination,' " and should be a positive for the stock, Blodget wrote.

Blodget speculated that Amazon kiosks in Wal-Mart's stores, and revenue-sharing on both sides could eliminate several risks for the troubled e-tailer. "It would give Amazon a presence in physical-world locations with enormous traffic," Blodget said, adding that the deal also eliminates a large competitor.

Fieler maintained his "attractive" rating and said that while expectations over a potential deal should serve to support Amazon's shares in the near-term, longer term support is contingent on an actual transaction.

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