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Empires pay billions for more visitors

The unprecedented speed, number and price of Internet combinations has redefined the corporate merger--and, critics say, contributed to the decline of the industry.


Empires pay billions for more visitors

By Jim Hu and Mike Yamamoto
Staff Writers, CNET
June 5, 2001, 4:00 a.m. PT

Excite@Home executives knew it might be a tough sell to investors.

In October 1999, the high-speed Internet service agreed to pay as much as $1 billion in cash and stock for Blue Mountain Arts, an online greeting-card company that made no money. To help justify the purchase, Excite@Home issued a press release touting Blue Mountain's "strong differentiated content."

But executives knew the primary reason was one of sheer numbers: Excite@Home was engaged in a bitter contest to claim the most visitors, and archrivals Yahoo, Lycos and AltaVista had made major traffic-boosting acquisitions that threatened to knock the company off the A-list of Web portals.

"It was a market share play," acknowledged one Excite@Home source who requested anonymity.

To many, the deal illustrates how far companies were willing to go to buy traffic at the time, even though the real value of those numbers remained unclear. Until the Internet economy began its steep descent a year ago, Web portals and other online companies were engaged in a kind of arms race through acquisition that produced multimillion-dollar deals seemingly every few days.

Growth by acquisition is a fact of life in any industry, but the unprecedented pace and price of Internet deals redefined the corporate merger in America. Yet as today's investors seethe over their dwindling portfolios, critics from Washington to Silicon Valley have denounced many deals as foolish decisions that backfired on companies and arguably contributed to the decline of the overall industry by squandering resources.

Driving this merger mania was the assumption--or hope--that raw traffic would eventually be converted to profits. Leading the charge were portals frenetically building empires throughout cyberspace in the belief that they who had the highest numbers would win all the spoils.

The fatal flaw in that strategy was an unrealistic reliance on advertising dollars, which companies hoped would increase indefinitely along with the number of people exposed to banner ads on Web pages. Even if the economy had not slowed, it is doubtful that ad revenue could have come close to supporting the inflated costs of megamergers--forcing companies to begin charging for their services.

"It was the fundamental faith that if the audience was gathered in sufficient numbers it would be monetized," said Marty Yudkovitz of NBC Digital Media, who worked on the development of the NBC Internet portal. "But in fact, it was jumping the gun considerably because there was no truly rational business model that was supporting the cost of acquiring that audience."

Let's go shopping
Of all the portals, Excite@Home is often attributed with starting the Internet buying spree that would make 1999 the year of the merger. The company was created by the estimated $6.7 billion combination of cable Internet service provider @Home and Web portal in January of that year, marking one of the first major marriages of Net leaders.

Just nine days after that deal was announced, Yahoo responded in kind. Worried that Excite@Home and Lycos were creeping up on it in the all-important traffic rankings, the leading Web portal announced plans to buy online community GeoCities for about $3 billion.

Two months later, in March, Yahoo raised the stakes again with a deal to buy Web streaming media company, a purchase that later closed at $5 billion.

Yahoo's concerns were not without substance. The month after it announced plans to purchase, rival Lycos issued a press release announcing that it surpassed Yahoo in "reach"--industry jargon meaning that more people had visited Lycos than Yahoo (51.8 percent to 50.8 percent of the total online population in the United States, respectively).

By July, Internet investment company CMGI decided that it needed to get into the acquisitions business as well. The company, one of the best performers on the Nasdaq Stock Market that year, announced its intention to buy AltaVista in a deal estimated to be worth $2.3 billion at the time of the agreement.

A pioneer of search engines, AltaVista had become a sort of Don Quixote of Web companies. It failed to evolve into a full-fledged portal like Yahoo, or Lycos, in no small part because of corporate confusion with former owner Digital Equipment.

CMGI launched a $120 million advertising campaign in hopes of turning AltaVista into a major Web portal to take on Yahoo, hiring multiple-Grammy winner Lauren Hill to perform at its relaunch party. True to its misfortunate self, however, AltaVista pinned the date of its initial public offering on the week after the market crash in April 2000. Since then, the company has shelved its plans to go public, undergone rounds of layoffs, repositioned itself as a search company, and lost its CEO.

Lycos, too, played heavily in the traffic game. The portal bought companies such as home-page community Tripod, financial service, online gaming site Gamesville, tech information site Wired Digital, and Web yellow page service WhoWhere.

The acquisitions "were meant to drive audience," said Bob Davis, former chief executive of Terra Lycos. That, in turn, was closely related to another goal at the time known within the industry as "stickiness": the ability to keep surfers on the site once they visited by enticing them with content and services.

"Audience was meant to drive stickiness, stickiness was meant to drive the network at large, and the network at large was meant to drive earnings," said Davis, who has parlayed his entrepreneurial experiences into a career in publishing and will soon release a new book titled "Speed is Life."

Those acquisitions, most of which were paid for in stock, helped keep the company in the highest of Media Metrix rankings through the dot-com crash last year. Lycos was then acquired by Terra Networks, a Spanish ISP looking

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Reassessing the madness
John Hagel, author, "Net Gain" and "Net Worth"
for a portal partner, for $6.5 billion. But between the day the merger was announced in May 2000 and its closure that October, the price of the deal was halved by the sagging stock market.

Enticing the offline giants
The misguided urge to merge was not limited to the pure Internet companies. Frightened of being outmaneuvered by scrappy Web start-ups, Walt Disney in 1998 purchased a 43 percent stake in search engine Infoseek for $465 million. That laid the groundwork for Disney's ill-fated portal, which the entertainment giant shuttered in January after reporting a $790 million loss and laying off most of the staff.

General Electric's NBC has encountered similar difficulties since taking a stake in the portal created by CNET Networks, publisher of, and combining it with online community and its flagship to create NBC Internet. The company initially went public and fared well, but its heavy reliance on advertising took a toll. In April, the network bought back all outstanding shares of NBCi, laid off most of its staff, and recast its Internet strategy to tie it closer to TV programming.

In many of these cases, the last link in the business-building chain--earnings--remained missing. And once evolutionary development of such Net ventures as and NBCi was stopped short, the value of traffic and the acquisitions made to increase it fell under wide criticism.

Because of its stature and recent financial problems, Yahoo has been the subject of much scrutiny for its acquisitions and other business strategies. Under this microscope, the decision to pay 21.5 million shares for GeoCities appears questionable to some, especially if the main objective was to increase traffic.

Home-page building "was a business that wasn't proved viable from an advertising standpoint," said Patrick Keane, an analyst at Jupiter Media Metrix. "The community sector is completely bankrupt as a revenue opportunity. It was a reach play."

Yahoo declined to comment on its previous acquisitions. But even Tom Evans, the CEO of GeoCities at the time of the acquisition, criticized the strategy, saying the Web portal failed to follow through with effective use of his company's strengths.

"Can you turn those eyeballs into dollars and those users into customers?" Evans asked. "I don't think Yahoo maintained fully the GeoCities model and all the things we were doing in GeoCities. What they determined to do was to integrate it into the Yahoo network."

The deal has been criticized as well. The multimedia company's core business of providing streaming technology for internal corporate Webcasts is a shell of its former self, according to people close to the company, and it remains unclear whether the division is drawing any significant advertising.

The portals defend their actions as necessary to compete in a world turned upside-down by unrelenting pressure to expand at virtually any cost. Many executives acknowledged the flaws in acquisition strategies but said they were trying to keep up with an insatiable demand by investors to raise stock prices.

"By acquiring you were able to add more tonnage into the network, keep your ranking high in Media Metrix, and that was a nice virtuous circle and it supported your stock price," said George Bell, former chief executive of Excite@Home. "It was a silly cycle in a sense that it had no basis in reality."

That is a troubling observation, especially if applied to Excite@Home's acquisition of Blue Mountain, for which it agreed to pay $780 million in cash and stock and another $270 million if the site met goals largely measured in traffic gain. The company reasoned that the deal was a way to enlist paid subscribers for its high-speed Net service from the millions of people who sent Web greeting cards through Blue Mountain's site.

The result has not been pretty. Excite@Home's stock traded around $40 a share at the time of the Blue Mountain deal but is around $4 a share this week. In January, the company wrote off $4.6 billion in intangible assets for the depreciation of value for both Blue Mountain and

The company is rumored to be seeking a buyer for the two entities, though no obvious takers have emerged. Only two years separate 2001 and 1999, but in Internet time, it might as well be a lifetime.

"It was shortsightedness," said Joshua Sinel, chief executive of Blue Barn Interactive, a New York community and chat company. "What they bought were eyeballs and traffic. But what they failed to realize was that buying people doesn't do much--it's what you do with them." 


In the Internet's heyday, traffic and usage determined the value of many high-profile mergers and acquisitions. Looking back, some companies may be hard pressed to justify the valuations.

NBC spends $5.9 million for Snap stake

When: June 10, 1998
Result: The TV network combines, and Snap to form NBC Internet. In April, it buys back a stake in NBCi and fires some staff, citing the advertising slowdown.

Disney buys Infoseek stake for $465 million

When: June 18, 1998
Result: The media giant reinvents the portal (now named, fires some staff, and takes a $790 million charge, citing the advertising slowdown.

@Home closes Excite deal for $7.2 billion

When: May 28, 1999
Result: The high-speed Internet company writes off $4.6 billion in intangible assets in January 2001, citing value depreciation of acquisitions of and Blue Mountain Arts, which it bought for $780 million.

Yahoo buys GeoCities for $2.87 billion

When: May 28, 1999
Result: The Web portal doesn't break out separate revenue figures, but analysts say ad sales are weak.

CMGI buys AltaVista for $2.3 billion

When: June 29, 1999
Result: The Internet incubator's $120 million advertising campaign to turn AltaVista into a portal fails. AltaVista's IPO is shelved, its staff reduced, and its CEO gone. The division is now a search technology provider.

Yahoo closes deal for $5.04 billion

When: July 20, 1999
Result: The portal doesn't break out financial information, but analysts say the core business of providing streaming services to businesses has declined.

Terra to buy Lycos for $12.5 billion

When: May 16, 2000
Result: The deal's initial value is cut nearly in half--to $6.5 billion--because of the souring market, CEO Bob Davis quits, and the Spanish Internet company reduces revenue forecasts.


Were underwriters really undertakers?

By Sandeep Junnarkar
Staff Writer, CNET
June 5, 2001, 4:00 a.m. PT

As an Internet analyst at investment bank PaineWebber, James Preissler witnessed the birth of traffic as the currency that would fuel the Internet's early commercial history.

He was part of the land rush of entrepreneurs, venture capitalists and investment bankers who latched onto traffic--the number of people visiting Web sites--as the measurement to gauge success in the absence of any established business precedents. Their thinking was simple, if not simplistic: Why bother with difficult matters such as revenue and earnings when big traffic was all that was needed for a successful initial public offering?

"There was no experience--we were all shooting in the dark," Preissler, now an executive at HelloAsia, an Internet direct-marketing firm, said in an unusually frank interview. "Everyone was making a very tenuous connection between basic metrics they didn't fully understand and some nebulous projections that it would become revenue."

Such was the dubious foundation for the house of cards that was to become the digital economy.

Start-ups manufactured from business plans drawn on the backs of envelopes were rushed through the IPO process by banks and other institutions in the complicated procedure known as "underwriting." In shepherding a company's stock to the open market, underwriters buy the new securities in preparation for selling them to institutional and retail investors.

In the past, underwriting a company meant taking on some risk. But as the Internet bubble grew, the process became akin to minting money at a time when companies routinely expected their stock prices to at least double or triple on their first day out. For the underwriters, the payoff comes from selling the stock at a higher price to the public than what they paid to the company--a practice that led Wall Street firms to reap record revenues from the IPO boom of the late '90s.

"Undoubtedly there was hype, and lots of money was made," said one investment banker who requested anonymity. "It is really hard to tell people to make less money: 'Come into work every day and make less money.'"

A lesson in objectivity
That hype is what others find troubling. Most, if not all, of these underwriters were part of larger financial institutions charged with providing impartial advice on stocks to individual investors. The ability of these institutions to remain objective while benefiting from underwriting certain stocks has long raised questions involving potential conflict of interest.

Some investment bankers say they served as the voice of reason, telling prospective companies to cut their projections in half and to create realistic goals. But others say such warnings were the rare exception at the height of the merger frenzy that gripped the industry.

These Internet content companies were some of the biggest first-day IPO gainers before May 2001.
Date of issue Company % change to 5/14/01 price from offer price Lead underwriter
7/16/98 Acquired Morgan Stanley
11/10/98 EarthWeb -69% J.P. Morgan
11/12/98 -96% CSFB
1/15/99 CBS MarketWatch -84% DLJ
2/10/99 Healtheon Merged Morgan Stanley
3/18/99 iVillage -96% Goldman Sachs
5/10/99 -90% Goldman Sachs
6/30/99 Ask Jeeves -86% Morgan Stanley
7/12/99 Chinadotcom -38% Lehman Brothers
10/28/99 Akamai Technologies -64% Morgan Stanley
11/18/99 CacheFlow -62% Morgan Stanley
12/8/99 Andover.Net Acquired WR Hambrecht
Source: Thomson Financial Securities Data
"I don't understand what (underwriters) mean by 'being the voice of reason,'" said Fred Taylor Isquith, an attorney at Wolf Haldenstein Adler Freeman & Herz, a law firm that specializes in securities class-action suits. "Underwriters are salesmen; they are committed to selling the stock."

Although the issue is not new, the practice of underwriting has fallen under unprecedented scrutiny in no small part because so many investors lost such large amounts of money in the free fall of Internet stock prices.

Take the case of, an online community site, which soared about 606 percent the first day it traded back in November 1998, pumped up by its exuberant traffic numbers--the steroid of choice. The stock has plunged more than 96 percent from its offer price as traffic figures have failed to produce promised revenue.

Wall Street's role in this kind of debacle has drawn the attention of Congress. Rep. Richard Baker, R-La., a member of the House Committee on Financial Services, on May 16 announced a hearing tentatively scheduled for mid-June to examine the possible conflict of interest between the investment banks' underwriting branches and their analysts, who purportedly provide unbiased opinions on stocks often held by their own banks.

"While the agenda for the hearing has not been set, when you examine possible conflict-of-interest issues in the investment banking business, the IPO question is likely to come up," said Michael DiResto, Baker's press secretary.

The voice of reason
Not everyone, of course, is willing to indict the entire underwriting industry. Some Web executives defended the banks that helped bring their companies to the public market.

"When we first met, (Morgan Stanley) told us we weren't ready to go public and set realistic goals for us," said Mark Cuban, the founder of "When we hit (the goals), we pushed forward on the IPO. They did a great job."

Cuban's experience, however, may be colored by his eventual financial success: He was one of a handful of executives to cash out before the bubble burst, making him an instant billionaire. Most executives and venture capitalists expressed frustration at any delays, believing the time was ripe to collect a windfall from their investments.

"The underwriters tried to keep some semblance of a financial model, but they underwent tremendous criticism for not pricing stocks higher," said David Menlow, president of the IPO Financial Network.

Pricing remains a controversial issue that is moving from Wall Street to the courts. A growing number of companies are facing class-action lawsuits filed on behalf of shareholders alleging that preferential deals with underwriters led to artificial demand and pricing.

"They decided that the best way to create a hot market is to make it look like a hot market--by creating great expectations of demand and excitement," Isquith said of the underwriters. "Whether they exercise their responsibilities in this market to people they were selling stocks for is a question of some import."

Many underwriters said their actions were dictated by the companies they represented. For example, setting the share price of an IPO based on projected traffic growth was always a point of contention. If an investment

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Where angel investors fear to fly
Steve Miller, angel investor, Origin Ventures
bank pushed too hard to scale back a company's projections, the start-up could just as easily approach a rival bank during the IPO mania.

"From a research point of view, you are trying to make sure the company can meet its projections. So you are trying to cut back on their projections, and that cuts down on their valuation," Preissler said. "That is where the biggest battle would lie--between the companies, the banks, the venture capitalists. That is where all the tension rose."

Others explain the phenomenon in more basic terms, as a function of human nature. Few professions are as competitive as the financial world, they note, so the blind rush toward going public was just a matter of survival.

"You are judged against your peers," Andrea Williams Rice of Deutsche Banc Alex Brown said with a heavy sigh. "If your peers have coverage of a promising sector or company that is generating enormous profits for them and you don't, you are putting yourself at a disadvantage." 


Although traffic as a measurement has fallen from favor, its role in propelling Internet IPOs skyward is not being scrutinized as unlawful.

Rather, Internet companies are being dragged to court for allegedly failing to disclose the behind-the-scenes deals they cut with underwriters that resulted in artificial demand and pricing of their shares on the eve of their IPOs.

The charge that appears repeatedly is that companies allowed underwriters to cut deals with preferred institutional investors, giving them shares at the IPO price under the condition that they commit to purchasing additional shares on the open market at a particular price.

"They created artificial demand by requiring people who received allocations of the IPO to buy additional shares on the open market--and created artificial pricing by having them committed to buy at a certain price level," said Fred Taylor Isquith, of law firm Wolf Haldenstein Adler Freeman & Herz. "That is the heart of the matter."


Executives benefit from Street smarts

By Larry Dignan
Special to CNET
June 5, 2001, 4:00 a.m. PT

Would you rather be Mark Cuban or Toby Lenk?

For those who follow the dot-com world, the answer to that question is easy. Most would choose Cuban, the former honcho who sold his

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When cashing out makes sense
Bob Davis, vice chairman, Terra Lycos
Web streaming site to Yahoo for about $5 billion two years ago and cashed in before the bottom fell out of the dot-com stock market.

Cuban went from paper billionaire to the real thing after he swapped his stock certificates for greenbacks. He bought the Dallas Mavericks and now has so much money that he doesn't sweat the $500,000 in fines he owes the National Basketball Association for bad behavior.

Lenk, on the other hand, did the opposite. The eToys CEO believed in his company so much that he hardly cashed in any stock options. His optimism cost him about $600 million in paper wealth as his online retail company descended into bankruptcy a little more than a year after its market peak.

Although some people seem disappointed with Internet CEOs like Cuban for selling their companies and cashing out, financial planners say these executives are simply following the kind of prudent strategies recommended for any investor, large or small. In the old days, stockbrokers advised clients to sell if they made 20 percent on an investment, a fraction of the exponential gains seen at the height of the New Economy boom.

Many top executives realized that the dot-com euphoria of 1999 and early 2000 couldn't last forever. They diversified some holdings to avoid keeping all their eggs in one basket--and to steer clear of the path taken by Lenk, who could not be reached for comment on his investment strategies.

"When you garner financial independence, it makes no sense to put it at risk again," said David Diesslin, a financial planner in Fort Worth, Texas, who says it's senseless to begrudge those who took some profits.

"Dot-com executives weren't the ones who bid up the stock prices," he said, alluding to day traders and individual investors who fed the frenzy.

Perfect timing
Lost in the relentless headlines about the dot-com meltdown is a notable list of winners who did fine, often benefiting from the merger mania that seized Web companies trying to grab as much traffic as possible at virtually any cost.

Former Lycos CEO Bob Davis sold more than 3.45 million shares worth about $72 million late last year, just months after his search engine was bought by Spanish Internet company Terra Networks, according to regulatory filings. Also in 2000, Eric Greenberg, founder and director for Scient, sold nearly 3.2 million shares with a value of $168.5 million, a sum well above the Internet services company's market capitalization today.

And chances are you'd do the same if you suddenly found $100 million in paper profits sitting in your lap. Why risk your future on one stock?

As Diesslin said, "At some point you have to protect yourself."

Cuban, who witnessed the software, networking and PC stock bubbles in the '80s and '90s, said he knew the dot-com euphoria couldn't last forever. Shortly after the deal closed in July 1999, he used hedging techniques to minimize losses from his options and sell his shares.

Contrary to popular belief, Cuban didn't cash out anywhere near the all-time highs. When he sold his stock, Yahoo shares were trading around $90, well short of the $250 high they hit a few months later. But Cuban's not shedding any tears.

"It didn't take any genius to figure out what I needed to do," he said in an e-mail interview. "It wasn't so much a diversification strategy as an 'avoiding-the-crash' strategy."

Harold Evensky, a financial planner in Coral Gables, Fla., said such first-hand experience with previous market busts is what saved some people who might otherwise have gambled their fortunes on the future. Many workers in Silicon Valley, especially younger ones, had never seen a recession and lacked the kind of risk meter that might have compelled them to sell at least some of their holdings before they collapsed.

"The idea is to put a big chunk aside so if it all falls apart, you'll be set," said Evensky, who added that economic manias usually have ugly endings. Evensky recommends that executives not have more than 5 percent of their personal net worth riding on company stock.

Financial planners acknowledge that not all executives can cash out at once. That can create political problems within corporations and can hurt a company's standing on Wall Street, as well as raise speculation about insider trading violations.

Thus, many executives, such as Microsoft Chairman Bill Gates and eBay CEO Meg Whitman, exercise and sell stock options at regular intervals to minimize scrutiny and speculation.

The key for financial planners is flexibility. Executives who took profits ahead of the dot-com train wreck now have other kinds of options--options to send their kids to college, options to choose a new career, and options to fund a new business venture.

"Taking care of your family is far more important," Cuban said, adding that he would have second-guessed himself forever if he hadn't cashed out. "As someone who has traded stocks for a long time, I'm a big believer that no one ever got in trouble for taking a profit." 


During the dot-com heyday, the following executives sold stock netting at least $100 million from September 1999 through December 2000:



Sale dates: Jan, May, Jun, Oct 2000

Eric Greenberg
Chairman/ director*

Sale dates: Nov 1999; Jan, May, Jul, Nov 2000

Keith Krach

Sale dates: Oct 1999; Jan, May, Jul, Aug 2000

Marc Bell

Sale dates: Nov 1999; Feb, Mar 2000

Craig Goldman
Former director

Sale dates: Jan 2000

* Greenberg quit as chairman in April 2000 but still is a director.

Sources:, SEC filings