Cherry-Picking the Sweet Deals Is More Fun Than Web Mergers

05/21/01 - 05:06 PM EDT

There are two kinds of Web consolidations under way: the blind leading the blind and the powerful cream-skimming the small but valuable.

James J. Cramer noted earlier the value of the former, though he didn't derogate the Web-Web transactions, as I do here. I'm talking about deals like E*Trade(ET - Cramer's Take - Stockpickr)(ET:NYSE)/Web Street Securities (WEBS - Cramer's Take - Stockpickr) -- companies whose reason for being is questionable, merging with each other to lower cost structures, eliminate the competition and prolong the eventual day of reckoning. The mother of all Web-Web consolidations, of course, was Webvan(WBVN - Cramer's Take - Stockpickr)/HomeGrocer, a billion-dollar deal that didn't matter then and doesn't matter now.

But there's another kind of consolidation that is far more important, the abovementioned cream-skimming type. The best example, also in the news, is Vivendi Universal's (V - Cramer's Take - Stockpickr) proposed takeover of MP3.com(MPPP - Cramer's Take - Stockpickr). George Mannes thoroughly details the ins and outs of this transaction, in which the French owner of Universal Music has offered to pay a combination of cash and stock worth $372 million for MP3.com. The San Diego company was a pioneer in the technology-aided music-stealing business. It got big bucks and decided to get right with the law long before Napster attracted what now looks like its 15 minutes of fame.

What's ironic is that after so much pain in the boom-to-bust history of e-commerce, the MP3.com acquisition represents the success of one of the very technologies that Web cheerleaders always said was going to be big. The Internet clearly is a big opportunity for the music industry. But all that whining about how the major music producers didn't "get it" now stands out in clearer focus. They got it. They just weren't going to pay billions for it.

Again, MP3.com is the perfect example. A look under its hood -- that is, at its balance sheet -- shows how relatively little Vivendi Universal actually is paying for MP3.com, the very company from which it won a $53.4 million cash judgment last year for copyright violations. MP3.com ended the March quarter with $91.2 million in cash. It recorded "strategic investments" of $11.4 million. In other words, Vivendi Universal actually is picking up MP3.com for about $270 million. That's about three times the $90 million analysts expect MP3.com to record in revenue this year, not an overly rich purchase price for Vivendi Universal. Not counting the $41 million MP3.com paid in the first quarter to settle a class-action suit by shareholders, the company lost about $5 million in the first quarter on revenue of $21.8 million. MP3.com spent about $6 million in the quarter on product development, the technology Vivendi Universal really wants. Seeing that Vivendi Universal is getting MP3.com's 40 million users and its meaningful revenue stream, the purchase begins to make sense. Cutting the $10 million in quarterly administrative expenses should be a snap.

As for all the investor money squandered by MP3.com along the way, well, that's a casualty of war, so to speak. Consolidation -- where it means putting viable Web technologies and businesses into the hands of companies that can utilize them -- will continue, and continue profitably. Adding a star to a winning team helps build the team. Putting together a bunch of losers simply is assembling a latter-day Bad News Bears.

Random Musings ... Goodbye Nasdaq?

Two abovementioned companies -- MP3.com and Web Street Securities -- will be disappearing from Nasdaq when their acquisitions are complete. Another, E*Trade, already made the switch. Add to that list recent Big Board converts Maxtor(MXO - Cramer's Take - Stockpickr), Sybase (SYBS - Cramer's Take - Stockpickr) (it takes the new ticker "SY" on Tuesday), and Krispy Kreme Doughnuts(KKD - Cramer's Take - Stockpickr), and you've got a legitimate exodus from the Nasdaq to the New York Stock Exchange. The papers are filled with laudatory pieces on NYSE stalwart IBM (IBM - Cramer's Take - Stockpickr) and woeful musings on Nasdaq poster child Cisco(CSCO - Cramer's Take - Stockpickr). That's a real sign of the times. Considering that "I" and "M" are available, can Intel (INTC - Cramer's Take - Stockpickr) and Microsoft (MSFT - Cramer's Take - Stockpickr) be far behind?