Net Plays Paying Paltry Premiums

If this week is any indication, investors hoping to strike it rich on Internet takeover plays may strike out instead when the companies are acquired.

On Tuesday, three different Net companies that announced deals to be acquired or merged into larger companies saw their stock drop on the news -- the result of minimal or nonexistent premiums to their current price and uncertainties over deal valuation. Music retailer CDnow (CDNW), advertising software developer NetGravity (NETG) and e-commerce company iMall (IMAL) saw their stocks decline on takeover news -- one day after portal company Infoseek's (SEEK) stock fell on news that it would be absorbed by Disney (DIS). The stocks are disappointing investors who expect takeover targets' share prices to rise as a matter of course, especially if they're Internet stocks.

But get used to it, say buy-siders and investment bankers. Increasingly, the acquiring company is a leader in an Internet market or niche, giving it greater power in the market and allowing it to balk at paying a premium for companies that have run up on takeover speculation.

No Takeover Pop
Company	52-Week Low	52-Week High	Tuesday Close	Tuesday Decline
iMALL	5 1/2	32 3/4	22	-1.4%
NetGravity	6 5/16	66 7/8	25 1/2	-7.3%
CDNOW	7	39 1/4	20 5/16	-8.7%
Infoseek	14 7/8	100	43 1/2	-5.3%

"What we're finding is that buyers aren't willing to pay traditional premiums off of what they view as an already affected stock price," says Chris Greer, head of Internet and e-commerce mergers and acquisitions for BancBoston Robertson Stephens. Greer's firm advised NetGravity in its acquisition by Internet advertising firm DoubleClick (DCLK) and iMall in its acquisition by portal/broadband access company Excite@Home (ATHM).

Though well below their 52-week highs, both target companies' stocks had risen in recent weeks, with NetGravity's stock up about 66% since mid-June.

"Everybody sees these deals coming, so by the time the deals get there ... a lot of the premium has been built into the stock," says another investment banker, who asked not to be identified, about recent takeovers.

Another explanation for declining prices of the takeover targets comes from investors' pessimistic assessment of valuation in certain deals. That may be one reason for Tuesday's performance by CDnow, which announced a planned merger with Columbia House, co-owned by Time Warner (TWX) and Sony (SNE) -- only to see its stock drop more than 8% to close at 20 5/16.

At issue for investors is the value placed on Columbia House (just as, in the aborted deal to earlier this year to create USA/Lycos Interactive Networks, the valuation of various properties controlled by USA Networks (USAI) was an issue for shareholders in Lycos (LCOS)).

"I don't think the Street quite gets it yet," says one CDnow shareholder, who says he's happy with the deal announced Tuesday. "This is going to be the center of e-commerce for both Sony and Time Warner ... I think this is a $26 stock." CDnow executives weren't available for comment.

There may be another, broader change at work to improve the bargaining position of acquiring companies: The growing power of larger Internet and media properties relative to smaller ones.

Clear leaders are emerging in different phases of the Internet business, says Greer, such as DoubleClick as a leader in outsourcing online advertising. Except for companies with radically different business and technology models, smaller companies scrambling for money and attention have to look to strategic alliances with larger ones as their ultimate exit strategy.

"There are going to be so many marginalized companies," Greer says. "The marketplace isn't big enough for all these companies, or even a significant number of them."

And that increases the power of the larger companies, say Greer and others. "Companies are realizing the competitive environment is changing," says an Internet analyst at a hedge fund. "It's critical to partner with the firms that are the leaders."

The gravitation toward leaders is a change from last year, when clear leaders didn't exist, says iMall Chief Financial Officer Anthony Mazzarella. But he says his company's desire for a partnership with Excite@Home doesn't mean his company got a bad deal. "We think Excite@Home is a bargain stock right now," he says. "This might not have been appealing if they had been at their all-time peak, price-wise."

NetGravity, too, alluded to the value of consolidating with DoubleClick as a reason why its shareholders got a good deal -- even though the value of the DoubleClick shares they would receive for each NetGravity share was $1.18 less than NetGravity's price of $27.50 on the eve of the deal's announcement. The deal isn't about the current price, but about "the opportunity to combine with a strong organization," said NetGravity CEO Eric Spivey on Tuesday.

>To order reprints of this article, click here: Reprints