Infoseek to go.com Into Disney's Gullet

Investors in Infoseek appear skittish, but top execs at both companies predict long-term strategic success.
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Disney's (DIS) - Get Report deal to take control of Infoseek (SEEK) may not have thrilled Infoseek shareholders. But it may improve prospects for the Internet operations of both companies, which will be folded together into a unit called go.com.

Among other benefits, the proposed deal will streamline operations, improve Disney's and Infoseek's ability to recruit executives and give current Infoseek shareholders the full value of Disney's brand name, according to executives at a New York press conference conducted by the two companies on Monday.

Eventually, as Disney chairman Michael Eisner explained, Disney's online investments will pay off in a world of high-speed, high-bandwidth Internet connections. That is, if the company can overcome initial shareholder skepticism and get a majority of Infoseek's non-Disney owners, who hold 58% of Infoseek stock, to approve the deal.

Theoretically, Infoseek and Disney have been working closely since last year, when Disney took a 43% stake in Infoseek. The two companies, which operate sites like

ABCNEWS.com

,

ESPN.com

and

NFL.com

through a joint venture, together launched the

GO Network

portal site in January. Disney properties that will be lumped together with Infoseek ones in the transaction include

Disney.com

, Disney's

Club Blast

children's site,

The Disney Store Online

and the offline

Disney Catalog

.

But as closely as the two companies may have been working, it hasn't been close enough, executives say. Until now, the logistics of arranging deals with two sets of legal, business development and production staffs made such arrangements difficult. Charles Davis, president of e-commerce at Disney's

Buena Vista Internet Group

, says that a deal with the

drkoop.com

(KOOP)

health site is the only advertising deal he can think of that covers all of the GO Network and online Disney properties.

"drkoop is probably our test case," says Beth Haggerty, GO Network's senior vice president of sales and business development.

Another advantage of the deal is the creation of a proposed go.com tracking stock that Disney hopes to use to reward and retain Internet talent. With Disney's stock trading near 28, down from its April 1998 high of 42 and about where it was in October 1997, it's been easy for Internet-related companies to tempt online employees with Internet-related stock options perceived to have much greater upside.

Eisner acknowledged as much on Monday. "We want our executives to be encouraged to stay with us and grow with us and grow in this new field," he said. A tracking stock balances the need for options-based compensation with Disney's absolute refusal to allow the Disney online brand to fall under the control of another company. "It is our lifeblood," Eisner said.

A fund manager and former Infoseek shareholder, who spoke on condition of anonymity, agrees that the tracking stock is a step in the right direction for employee retention.

It's unclear whether the proposed transaction, in which current non-Disney Infoseek shareholders would end up with 28% of Disney's go.com tracking stock, is a good deal for Infoseek shareholders. Shareholders themselves seem to think not. Infoseek shares fell 5 9/16 today, or nearly 11%, to close at 45 15/16, on triple the stock's average volume. Disney, however, was up 3/16 to 27 13/16.

Early Monday, PaineWebber Internet analyst James Preissler estimated that Infoseek shares were being valued at $52 per share -- only 50 cents above the closing price for Infoseek Friday night.

Asked about the premium for Infoseek investors at the press conference, Eisner noted that when the companies disclosed June 7 that they were discussing the deal, Infoseek was trading at about 38. (After

The New York Times

reported a possible deal that day, the stock rose 6 5/16 to close at 43). Infoseek CEO Harry Motro said information about valuation would be disclosed in subsequent filings.

"There is a premium in the deal," said Motro, who plans to step down after a transition period following the deal's completion. For Infoseek shareholders, one of the big advantages is getting a stake in the Disney.com name and a presence they don't have in the GO Network alliance. "That is of huge value," Motro said.

But the real value, according to Eisner, will come during the next decade. Within 10 years, people will be getting full-screen, full-motion video through the Internet, he said Monday. The Internet will mean getting full-fledged movies and music in a customized form -- or, as he put it, "My ABC, my movie library, my Thursday night." At that stage, it'll be entertainment and information which drives the Internet economy, not services such as email.

And it will be profitable, Eisner said. "It is not a badge of honor never to make a dollar," Eisner said. "However, we understand you have to invest to get to that point."

Of course, Disney will continue to encounter skepticism. "I'm not that much of a believer in Disney's ability to play the game," says another money manager who asked not to be identified and who does not own Infoseek.