Investors Cheer Preview Travel's Merger, but the Euphoria May Fizzle

Its stock has risen since news of its merger with Sabre's Travelocity unit. But similar mergers of small Net companies have gone from Wall Street darlings to Wall Street washouts.
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SAN FRANCISCO -- Preview Travel (PTVL) is high on its plans to merge with Sabre Holdings' (TSG) - Get ReportTravelocity unit, but can it last?

Preview Travel shares have more than doubled since the news was announced Monday, rising 31% on Wednesday alone. And Sabre's stock has risen a more moderate 17% since the announcement. By rolling two second-tier e-commerce companies into a new, improved entity to be called

Travelocity.com

, the idea is to give both a new jolt of youthful Internet energy.

But hold on. Based on other attempts by little fish to school up --

Onsale

(ONSL)

and

Egghead.com

(EGGS)

;

CDnow

(CDNW)

and

N2K

-- the enthusiasm will likely give way to the indifference with which Wall Street regarded these stocks before the merger announcement.

Both mergers were greeted with sanguine expectations of larger customer bases and lower costs. But with little evidence that either is living up to the merger hype, investor sentiment has turned cold again.

"Merging on paper looks good, but what they are finding is that it's tricky to handle," says Sara Zeilstra, a

Warburg Dillon Read

analyst. "Will they be able to maintain all the users? Will there be brand confusion?" Those issues come up in a world of ever increasing competition, says Zeilstra, who rates Preview Travel a hold. (Warburg has no underwriting relationship with the company.)

For the most part, analysts have been enthused about the Preview Travel merger. Zielstra points out that Preview Travel's content is a good fit with Travelocity's technology. Lauren Cooks Levitan at

BancBoston Robertson Stephens

upgraded Preview Travel to a buy from a long-term attractive Tuesday, citing "significant synergies resulting in cost savings and improved revenue generation." (BancBoston has an underwriting relationship with Preview.)

So why do money managers seem so blase on the stock? Eric Efron, co-manager of the

(USAUX) - Get Report

USAA Aggressive Growth fund, admits that "by joining forces, they can be more viable." But being viable isn't enough anymore to keep an Internet stock rising. "The barriers to entry are virtually non-existent, but the barriers to success are high," says Efron.

Efron says he has no plans to pick up Preview Travel shares, even though his fund sold its position in the stock last week.

Much of the buying during Preview Travel's rally is from individual investors, says a trader who asked not to be identified and who works for one of the company's lead market makers. "I haven't heard of any big institutional buyers," he says. "It's probably retail America buying this stuff."

The nonchalance from money managers seems to be the same for the other newly-merged companies. Since announcing an intent to merge, Onsale is down about 35%, while Egghead.com is off about 40%. And CDnow rallied from 8 at the time of its N2K merger announcement to a record high of 39 1/4 in December -- partly on hopes for a strong 1998 holiday season. But it has steadily slumped as the supposed synergy was supposed to kick in, closing at 14 1/4 Wednesday.

That's an indication that the merged companies haven't won the praise of the institutional investors. As of the end of the June quarter, CDnow had 38 institutional investors, down from 48 at the end of the March quarter, according to

BigDough.com

, a Web site tracking institutional holdings.

Market Guide

data shows institutions selling 2.97 million shares for the second quarter, against institutional buying of 2.46 million shares.

Despite the bearish precedents those previous mergers present, the planned combination of Preview Travel and Travelocity appears to be a bit less of a last-minute struggle for survival. Both are in the six top-visited travel sites, according to

Media Metrix's

August results -- the most recent data.

And Sabre gives the merged company some stability with its deep pockets and access to capital, if necessary, says Paul Cook, a fund manager at

Munder Capital Management

, who holds no position in either stock. "I'm less sour on this combination," he says, citing only moderate competition from

Microsoft's

(MSFT) - Get Report

rival

Expedia

service. "Expedia isn't

Amazon

(AMZN) - Get Report

-- yet."

Still, he's on the sidelines. And in the market, actions do speak louder than words.