2HRS2GO: Avoid playing takeover games

4 min read

Internet stock buyers can forget about getting a premium for anything right now.

Have an opinion on this?

Take a gander at this week's events:

-- Onsale Inc. (Nasdaq: ONSL) joins Egghead.com Inc. (Nasdaq: EGGS). Price tag at time of announcement: $400 million.

-- Doubleclick Inc. (Nasdaq: DCLK) buys NetGravity Inc. (Nasdaq: NETG). Price tag at time of announcement: $530 million.

-- CDnow Inc. (Nasdaq: CDNW) merges with Columbia House. No concrete value available, since it's one of those Form A Whole New Company kind of arrangements.

-- Ditto for Infoseek Corp. (Nasdaq: SEEK) melding with the rest of Disney's online portfolio.

Barring some sort of out-of-this-galaxy valuation (granted, with the Web, anything's possible) for the entities arising from the last two items, none of these deals will pay more than the preannouncement closing price to shareholders of the targets. Even with the market's overall gains over the last several weeks -- Nasdaq Composite Index up nearly 17 percent since late May, S&P 500 up more than 8 percent -- companies are actually treating their stock as if it were real money. What a novel idea.

Many stock buyers may be blinded by renewed Internet hype, but the companies actually consolidating have a more sober outlook. They're not going to overly dilute their shareholders' holdings by acquiring a money-losing, second-tier operations, just because a speculative market drives prices higher.

Unlike a Broadcast.com, or even a more debatable case such as Geocities, the current crop of acquirees aren't perceived as market leaders in their niches. CDnow sells less music than Amazon.com does. Egghead.com is just one of several competing software retailers. NetGravity has had occasional difficulty getting its press releases right, let alone breaking into the top rank of online advertising. Infoseek hasn't been able to crack into the top rank of portals despite being one of the earliest ones.

Top players aren't acquisitions candidates anymore. No one's going to buy Amazon.com, eBay, or Yahoo, to name the three most prominent examples.

That leaves these second-tier players, most of which lack leverage to negotiate high prices for their buyouts. If you're a money-losing dog looking for an owner, at least be the top canine in the pound, because that's the only way you'll get a good price. Stock buyers hunting around for takeover candidates should look for companies with solid fundamentals or, at the very least, market leadership; in other words, do what you would normally do in evaluating a company, and forget about takeover speculation. At the very least, you end up with a company you like.

But stock buyers who play on takeover rumors not only risk owning shares of a crappy Web stock, they might end up with two ugly ducklings (Onsale and Egghead) instead of just one. Or worse -- a traditional, old-fashioned company (Columbia House or Disney). Sort of defeats the whole purpose of focusing on Internet stocks, don't you think?

Other issues:

  • Network Associates Inc.
  • (Nasdaq: NETA) The stock is rising today on takeover rumors and possibly some optimism about next week's earnings announcement. But as with the aforementioned Internet stocks, it seems unlikely that anyone would pay much beyond current market value for Network Associates, which has no leverage at all to negotiate a top price, given the company's disappointing performance lately. And Network Associates' insistence on pushing security suites, rather than focusing on top individual products, still doesn't go over well with its target corporate audience, which prefers best of breed when it comes to network security.

  • Apple Inc.
  • (Nasdaq: AAPL) First Call's consensus estimate predicts earnings of 64 cents a share for the fiscal third quarter, whose results are scheduled for release today. But the company's performance in recent quarters has made upbeat quarterly reports something to be expected from Apple; we already know management can manage costs well and sell its wares aggressively.

    Now -- as with yesterday's conference call for Intel -- the market wants to hear about future targets, rather than results for the quarter just ended. Maybe iCEO Steve Jobs doesn't want to trump next week's Macworld Expo, but Apple should at least give investors some product announcements to look forward to, especially given the age (in today's environment, products more than six months old qualify as relics) of the iMac and the increasing speed with which the Windows world gets new chips and chipsets. The biggest boost of all would be firm (or at least firmer than "sometime this year") shipping dates for the consumer portable. And how about more details on financials related to Quicktime? After all, it is Apple's most widely used product.

    The overall market was mixed in mid-afternoon. With two hours left in regular trading, the Nasdaq Composite Index was up 21.55 to 2799.78, the S&P 500 up 1.30 to 1394.86, and the Dow Jones Industrial Average down 12.35 to 11162.67. 22GO