Net companies in demand

Despite their billion-dollar valuations, Internet companies may hold the key to old media's push into the online world.

They also hold an interesting, albeit expensive, way for companies across all industries to cash in on the bull run Internet stocks have been on lately, according to analysts.

For example, Zapata, a Texas-based company that owns fish-oil processing and food-service operations, tried to buy its way online yesterday by making an offer for Excite. However, the No. 2 Internet directory today rejected Zapata's $72-per-share unsolicited bid.

While the pair seem like an unlikely couple, Zapata's courtship of Excite makes one thing clear: Companies anxious to become players online can't be frightened of taking an expensive plunge in order to buy their way into Internet and the potential it holds for big-time profits.

That potential is what has made the "portal" business such such an attractive and crowded space. Software giant Microsoft is getting in the game as well, gearing up to offer its "Start" page later this year, and Netscape currently is in the process of building out its NetCenter service looking to make its mark on the portal market.

"Companies throughout all industries are recognizing that the Internet does matter," said Chris Charron, an analyst at Forrester Research. "The valuation has caught the eye of a lot of managers and owners of businesses, and nobody wants to be left behind."

A year ago, Excite, Yahoo, Infoseek, and Lycos were simply search engines. But they all have morphed into their current states as they have shifted their focus toward offering more services. Their efforts have boosted their values in all cases.

Excite has a market capitalization of $1.41 billion based on yesterday's closing price of 60.19, Yahoo's market cap is $5.41 billion based on its closing price of 116.88, Lycos is valued at $950 million based on a closing price of 61.06, and Infoseek is worth about $916 million based on its stock price of 29.25.

With market capitalization in the billion-dollar range, "[these companies] are a big pill to swallow," said Andrea Williams, an Internet analyst at Volpe Brown Whelan.

And naturally, the skyrocketing valuations of these companies tempts others to make a play to get in on the action.

Robert Seidman, an industry analyst and editor of the Online Insider newsletter, said some, like Zapata and K-Tel, are not interested in the portal space, but rather are trying to increase their own market cap by marketing themselves as Internet companies.

Either way, consolidation in the sector is expected to start as early as this year, though it most likely will be between companies--like traditional media companies--that have strategic fits with the major leaguers.

Time Warner and Gannett are looking seriously at the portal business, and are closely watching Excite, Lycos, and Infoseek, Charron said. "They are most poised to be bought," he said, adding that the middle-tier players and the small players will benefit too.

LookSmart, a privately held Internet directory, is valued at about $40 million or $50 million, Charron estimated, "and at some point, that looks attractive" when compared with billion-dollar valuations.

The resources and promotional capabilities of a big media company make second-tier Internet players attractive, particularly if a billion-dollar acquisition is too big of a bite to chew.

Taking on a smaller player, however, does not come without risk.

A media company that has not had much success building its own Web audience coupled with a smaller Internet player would be a risky proposition, Williams said, noting: "Money isn't enough, but money can certainly help."

Charron agreed.

"There is a great fit between content, deep pockets, ad packages, and offline advertising," said Charron. "And consolidation will impact the small- and medium-sized companies, and it should bid everyone up."

Another option that media companies have opted for is buying up smaller, targeted Web sites that may not be one of the top ten Internet sites, but may be one of the top players in its niche.

"CBS has helped SportsLine and ESPN has helped SportsZone," she said. "That kind of promotion is beneficial."

For media companies that are unsure of the Internet, a partnership might do the trick, said Seidman.

ABC, for example, could look at buying something like Yahoo or Lycos, but a less expensive proposition with less risk might be to team up with one of the smaller players for a multiyear deal.

"That gives them time to think about where the market is going while they are hedging of the bets," said Seidman. "But it still gives them an opportunity to build a great site [by leveraging an existing company's technology and online experience, and by doing it quickly]."