Net stocks outpacing blue chips

Internet companies are vaulting past their blue-chip brethren in terms of market capitalization--a move that brings more than bragging rights.

Ticketmaster Online-CitySearch topped the market value of financial publisher Dow Jones, while electronic brokerage Charles Schwab yesterday eclipsed brick-and-mortar investment bank Merrill Lynch, before giving up ground in later trading.

Last week, the value of America Online surpassed entertainment giant Disney.

And so it goes. Internet directory Yahoo, valued at $26.3 billion this morning, is worth more than film giant Eastman Kodak, while Amazon.com, with a market cap of $17.7 billion in early trading, is worth more than retail giant Sears & Roebuck.

What does this mean for these Internet companies?

For starters, companies looking to make an acquisition generally have to pay at least the market capitalization--and usually more--to purchase the target company. That means any potential buyers for Ticketmaster Online, AOL, or Amazon would have to cough up more money than if they were to buy Dow Jones, Disney, or Sears & Roebuck, respectively.

Further, while high market caps may discourage potential suitors for these Internet companies, their valuations enable them--indeed prod them--to undertake their own "acquisition path."

"In order to keep the valuations they have, these kinds of companies have to put their market cap to work and use it to buy other companies," according to one investment banker. "They have to become bigger enterprises in order to sustain the valuations they have today."

The bragging rights that come with a large market capitalization come with a downside as well. "When you have these super-high valuations, expectations are high for the company to grow and be successful. The slightest hiccup, however, can burst the bubble," the banker said.

Internet companies with rich valuations may also find it more difficult to attract executives with the lure of options. That's because options are usually priced at a fair market value when an executive arrives, and if the stock is trading at a high level, the prospective candidate may believe there is little upside left in the stock in the near term.

Still, Internet companies are not only surpassing blue-chip companies in market capitalization, but also finding their way onto Wall Street indices.

America Online, for example, will be added to the Standard & Poor's 500 at the end of the week. That follows Amazon.com's recent inclusion in the Nasdaq 100 Index.

"When a company is added to an index, a lot of index-oriented funds have to go out and buy shares of that stock," said the banker. "AOL's stock has gone up since the announcement. It's supply and demand and drives up the valuation."