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THE DAY AHEAD: Takeover premiums dwindle

Investors and high-tech executives have to be wondering whatever happened to those alleged takeover premiums.

The conventional wisdom -- at least until recently -- was the following. Some companies, especially the Internet variety, may not cut it as stand-alone entities, but were valuable because they could become good takeover targets.

Shareholders of these takeover targets would bring home a nice premium of 20 percent to 50 percent and everyone was happy. See OpenTV's (Nasdaq: OPTV) March acquisition of Spyglass (Nasdaq: SPYG) as an example.

Most of these deals were stock swaps, so the acquirer was paying overvalued prices with overvalued currency. Many dot-coms had $10 tacked on to their share prices in anticipation of a buyer someday.

Volatile markets have quashed that thinking.

Mergers of equals

Last week, two Internet mergers highlighted the no-premium trend. These deals were billed as mergers of equals, but investors weren't buying it. Wall Street went with the "consolidation because of weakness" theme and pummeled shares.

The first of these deals was the Webvan (Nasdaq: WBVN) and HomeGrocer.com (Nasdaq: HOMG) engagement. Webvan bought HomeGrocer last Monday in a deal that valued HomeGrocer at $9.38 a share, just a little more than $1 a share higher than its closing price Friday. Shares have tanked, but the slight premium remains. HomeGrocer shareholders aren't walking away with much, especially the folks who bought in at the IPO price of $12.

Aside from the strategic possibilities between Webvan and HomeGrocer, investors didn't get much. Executives maintain that shareholder value will emerge as the two parties cut costs and expand. It didn't fly.

Media Metrix (Nasdaq: MMXI) and Jupiter Communications (Nasdaq: JPTR) followed up with a merger of equals.

Media Metrix valued Jupiter slightly above its closing price last Monday. Investors were steamed and pushed shares lower. Management talked about new revenue streams and how the combined companies would produce a one-stop Web statistic shop. Sounds nice, but shareholders still like a little gravy with their takeovers.

This merger of equals development can't be good for a lot of investors, who are holding out for buyers to rescue the likes of CDNow (Nasdaq: CDNW), Streamline.com (Nasdaq: SLNE), Drkoop.com (Nasdaq: KOOP) and a host of others. Some of the struggling dot-coms may arguably deserve a premium, but that doesn't mean they'll get it.

Private company premiums

In fact, only private companies are garnering a premium price, albeit a lower one than a few months ago. Internet giants are plucking ready-to-go-public firms with ease. Since there's little information available on private companies and they're a bit harder to value, venture capitalists and the like just love acquisitions as an exit strategy.

Ariba (Nasdaq: ARBA) bought privately held SupplierMarket.com in a deal valued at $581 million. Since SupplierMarket, a business-to-business e-commerce company, was close to an IPO, it floated what it thought it could be worth on the public markets. SupplierMarket reckoned it was worth $432 million.

Given that B2B shares are rocky, there was a decent chance SupplierMarket wouldn't carry a $500 million-plus market capitalization on the public markets. The best choice was to sell out to Ariba.

Yahoo! (Nasdaq: YHOO) also ponied up $428 million in stock for privately held eGroups, which also filed to go public.

Our guesstimate is that eGroups would have had a tough IPO reception. However, eGroups has community and cool technology for Yahoo to leverage. The premium is hard to determine, but it's safe to say eGroups' backers made out pretty well.

The private company premium factor wasn't lost on entrepreneurs at PC Expo last week. Chip Austin, managing director for incubator I-Hatch, said very few companies actually make it public and being acquired is often the best choice. "It's not just about the IPO," said Austin, speaking at PC Expo seminar. "There are a lot of other ways to finance your company."

His topic was "How to prepare for an IPO -- Even if you wind up a buyout candidate."TDAIN


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