Yahoo!, Kmart Subdued Despite Impending Internet Deal

The companies are expected to announce details of a distribution partnership Wednesday.
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An expected Internet agreement between






failed to send either company's shares surging Tuesday, raising questions about what impact the deal would have.

Yahoo! was down 13, or 4%, at 338 by midafternoon, while Kmart was up 5/8, or 5%, at 12 1/8 after being down most of the day. (Yahoo! finished down 17 7/8, or 5%, to 333 1/8, while Kmart closed up 3/8, or 3%, to 11 7/8.) The companies were expected to announce details of a distribution partnership, including free co-branded Internet access, on Wednesday.

A Kmart spokeswoman said its chief executive, Floyd Hall, would make an official announcement about the company's e-commerce strategy at a press conference in New York on Wednesday morning. She declined to elaborate.

Officials at Yahoo! did not return calls for comment.

Michael Exstein, an analyst who covers Kmart for

Credit Suisse First Boston

, said it was premature to evaluate the expected deal, which was first reported in

The Wall Street Journal

Tuesday. But he added that he doubted whether a tie-up with Yahoo! would have a significant impact on Kmart's revenue.

"Kmart has aggressively rolled out in-store kiosks to get e-commerce going," Exstein said. "But the truth of the matter is I don't think it's had any effect on their business."

Exstein has a hold recommendation on Kmart and does not do any underwriting for the Troy, Mich.-based company, the third-largest retailer in the U.S.

Exstein noted that unlike other recently announced tie-ups, such as the deal between


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, this one would involve a no-fee Internet service provider.


Goldman Sachs

analysts said in a report that they viewed the deal favorably, noting that it would allow Yahoo! to expand its customer base without having to create an ISP infrastructure.

"An alliance would allow them to reach the fastest demographic coming onto the Web," the report said, referring to the 96 million Americans who have incomes of under $50,000 a year and are still to become Internet users.

Yahoo!, which is based in Santa Clara, Calif., is on Goldman Sachs' U.S. recommended list , the firm's highest rating. The investment bank took Yahoo! public.

Jimmy Wu, a Goldman Sachs analyst, blamed profit-taking for the drop in Yahoo!'s stock price. Yahoo! has surged 65% over the past nine trading sessions.