2HRS2GO: Pay no mind to rumors

COMMENTARY -- The worst part about bad news is the rumor-mongering that goes with it.

It's inevitable when a company goes into the gutter. Financials turn to shambles, investors start looking for ways out and the next thing you know, speculation spreads like flies around a dung pile.

Names of potential acquirers fly through the message boards. Stories about management overhauls and proposed merger partners spread across trading floors.

This week provides the latest examples.

Yesterday PSINet (Nasdaq: PSIX) and Digital Island (Nasdaq: ISLD) gained 60 percent and 22 percent, respectively, on the hope that Sprint (NYSE: FON) would buy them. Lucent Technologies (NYSE: LU) picked up more than 8 percent this morning, because someone floated Alcatel (NYSE: ALA) and Nokia (NYSE: NOK) as possible buyers.

There's little need to recount the troubles facing PSINet and Lucent. Suffice to say that each company is a mess, and it's reflected in the stock price.

News stories listed strategic reasons for the acquisitions and ways to pay for them. Reuters quoted an anonymous analyst who suggested Alcatel could use Lucent as an entry into the U.S. market for optical networking. PSINet speculation centered around the fact that Sprint plans to move aggressively into Web hosting.

You can come with a rationale for any deal if you try hard enough, but a little realism would better serve investors.

Only a crazy corporation with far too much money on its hands would dare buy Lucent. Even if the company wasn't an operations nightmare, integrating such a huge organization would create enough problems and distractions to make competitors drool.

Mergers of large competitors rarely happen in the technology industry. Smart companies buy complementary technologies, not overlapping ones. Recall Cisco (Nasdaq: CSCO) CEO John Chambers' explanation during his company's fourth quarter conference call back in August: "We don't acquire competitors. We almost entirely focus on new markets with our acquisition moves, and occasionally where we might have mis-executed ourselves."

That generally means buying relatively new companies, not dinosaurs like Lucent.

At the other end, Nokia buying Lucent makes about as much sense as AT&T (NYSE: T) buying a cable company. Wait, AT&T did buy a couple of them.

Look how that turned out.

About buying complementary businesses, you could argue that Digital Island or PSINet meshes well with Sprint. After all, Sprint almost has to make an acquisition for expansion, following the collapse of the Worldcom (Nasdaq: WCOM) merger, right?

Maybe, maybe not. But think back to that Worldcom failure for a moment. Remember that Worldcom Sprint fizzled because of short-sighted regulators' distress about combining the backbones of Sprint and Worldcom's UUNet unit.

By the way, what is PSINet's core business? Not Web hosting, but Internet backbone services.

Granted, UUNet already commands the largest share of that market. But PSINet, despite its woes, is a significant player in the backbone world. Regulatory scrutiny of a PSINet-Sprint deal would be intense, to say the least. If Sprint is going to buy a Web hosting company, it would likely buy one that offers fewer headaches.

These companies know all this, but desperate shareholders float ideas that turn into rumors that morph into market-moving "news". Deutsche Telekom (NYSE: DT) buying BellSouth (NYSE: BLS). Yahoo (Nasdaq: YHOO) scarfing up eBay (Nasdaq: EBAY) or Excite@Home (Nasdaq: ATHM). Almost anyone buying drkoop.com (Nasdaq: KOOP).

Sure, some rumors turn out to be true. America Online (NYSE: AOL) really did buy Netscape. Worldcom did take a run at Sprint. But the odds aren't good, and it's not worth the risk of betting on suffering shares. After all, the stock was probably beat up for a good reason. 22GO>