Net Stocks Rocket on AOL-Time Warner Deal

But not AOL itself, which actually drops in trading.
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America Online (AOL) was one of the few Internet stocks that did not benefit from today's news that it would be merging with Time Warner (TWX) .

America Online closed down 2 1/2, or 3.4%, at 71 1/4 as traders attempted to determine the ramifications of the deal. AOL shareholders will receive one share of the new company, while Time Warner shareholders will receive 1.5 shares of the new stock. As of the close of trading, the deal was valued at $174 billion.

TheStreet.com Internet Sector

index, or DOT, closed up an amazing 76.28, or 7%, at 1161.17 as the AOL news reinvigorated the sector by serving to validate valuations, while also squeezing those who shorted the market last week. AOL was all over the board before closing lower. The stock traded as high as 80 early in the session, gave back all its gains and traded as low as 70 1/4 before closing near session lows. Time Warner traded as high as 102 before closing up 25 1/8, or 39%, at 89 7/8.

Though analysts applauded the deal, particularly because AOL will now have access to Time Warner's

RoadRunner

high-speed Internet access service, investors were left scrambling with how to price AOL. AOL shareholders will receive 1 share of the new company for each share of AOL they own. Time-Warner shareholders receive 1.5 shares of the new company for each share they own.

Credit Suisse First Boston

analyst Liz Buyer wrote that valuing hybrids of old- and new-media companies was "more art than science," but attempted to do so anyway. Buyer put a value of between $88 and $97 per share on the company based on 2001 revenue estimates. With what she says is a "healthy" discount rate of 25%, she arrived at a range "in the high $70s to mid-$80s."

"We think this merger makes tremendous sense from all strategic perspectives and believe the combined entity has tremendous potential," wrote Buyer. "The key, of course, as with all mergers, will be in the execution."

The stock that appeared to be benefiting the most from the deal was

Yahoo!

(YHOO)

, which now is seen even more as a candidate to be involved in a merger with a major media firm. Gains also came ahead of Yahoo!'s earnings report after the close on Tuesday.

Yahoo! is expected to report earnings of 15 cents per share, though the whisper number is closer to 20 cents. Helping to prop up the stock are expectations that the company will announce a split alongside its numbers.

Also benefiting from the deal were any number of content providers and portals.

Excite@Home

(ATHM) - Get Report

, which closed up 1 3/16, or 3%, at 40 1/8. The merger helps validate cable as the predominant broadband platform.

Lycos

(LCOS)

closed up 8 5/8, or 12%, at 79 3/4. And

CMGI

(CMGI)

, which holds a minority stake in Lycos and a majority stake in the soon-to-be spun off

AltaVista

portal, closed up 31 1/2, or 12%, at 306 1/2.

Elsewhere in the sector,

E.piphany

(EPNY)

, a provider of Web-based software solutions, closed up 24 3/4, or 16%, at 181 1/4 after the company preannounced quarterly results. E.piphany reported a loss of 24 cents per share for the quarter vs. the 31-cent loss estimate from

First Call/Thomson Financial

and a $1 per share loss for the fourth quarter a year ago. Revenue of $8.7 million was 64% greater than the third quarter. Its financial report is scheduled to include summary results for 1999's fiscal fourth quarter. E.piphany plans to release a full financial report Jan. 26.

eGlobe

(EGLO)

closed up 1 7/8, or 21%, at 11 following news Friday that it had formed a new company,

i1.comm

, which will specialize in providing business-to-business e-commerce solutions in China and other countries in East Asia. The stock traded as high as 15 1/4 before profit-takers stepped in.

Internet super carrier

PSINet

(PSIX)

closed up 11 7/16, or 19%, at 72 7/8. The company aid today it expects to nearly double fourth-quarter revenue to $185 million, compared with $93.9 million in the year-ago period, as the company experiences increased demand in all of its businesses. PSINet also said it had signed wholesale Internet connectivity agreements with

Freei.Net

and

iFreedom

, two free service providers.

Juno Online

(JWEB)

finished up 4 7/8, or 15%, at 38. The company said after the close on Friday that its subscriber base for its paid premium service climbed to 550,000 in the fourth quarter, a 38% increase from the third quarter. Juno is expected to report earnings on Tuesday. Note that Juno filed an offering last

week to sell 5 million shares of stock.

One stock not participating in the rally was

Internet Capital Group

(ICGE)

, which closed down 8 1/16, or 4.6%, at 165 3/4. A negative news report about the stock ran in

Barron's

over the weekend. The story focused on ICG's valuation, but also noted a huge lockup that comes off the stock in the coming months.