Big bucks are there for the taking in the online promotions business. But that doesn't mean investors who enter now will hit the jackpot.

The potential of online promotions -- everything from sweepstakes to giveaways and frequent-flyer programs -- has generated plenty of attention in recent days. A deal between

America Online

(AOL)

and

AMR's

(AMR)

American Airlines

, and the massive traffic generated by a

CBS

(CBS) - Get Report

Web site combining a portal with a million-dollar giveaway, suggest promotions will be as important in the online world as they are off line.

As a result, analysts and executives say consolidation is likely among online promotions firms, raising the question of which companies might make solid takeover plays. But with promotions stocks having levitated late last year amid the

Nasdaq's

rally, investors must first ask whether the entry fees for the game are too high.

Pot of Gold

Suddenly looming over the online promotions business are AOL and American Airlines, which said Monday they were launching a joint venture called

AOL AAdvantage

that marries the world's largest airline frequent-flyer program with

AOL Rewards

, the incentive program AOL has operated since 1996. AOL is hoping that it will give its consumers a more compelling reason to participate in its rewards program, which like AAdvantage and other incentive systems is designed to build loyalty among users and garner revenue from merchants participating in the promotion. Fewer than 10% of AOL's members have used its rewards program in the past six months, according to statistics from the company.

Investors have a choice of publicly traded promotions companies in which to invest, including

Netcentives

(NCNT)

,

MyPoints.com

(MYPT)

,

Cybergold

(CGLD)

and

FreeShop.com

(FSHP)

.

Consolidation in this area is likely, say analysts, with advertising companies such as

DoubleClick

(DCLK)

,

24/7 Media

(TFSM)

and

Engage Technologies

(ENGA)

possible candidates for acquiring promotions companies. Portal sites like

Yahoo!

(YHOO)

are possible buyers, too.

At the end of the rainbow is a part of a market that industry trade journal

Promo Magazine

estimates was $85 billion in 1998. Online marketers are hoping that the tools promoters use in the three-dimensional world to build store traffic, get consumers to sample new products and build marketing databases, can drive visitors and buyers to their online stores. "I'm sure that every portal and every points program and every airline right now is in a big mating dance," says Perry Boyle, an analyst at

Thomas Weisel Partners

.

The Premium Question

What price they might be bought for, however, is a question for the promotions stocks; these stocks have leaped in popularity over the past few months, though they've fallen from their December highs. Boyle points out that promotions companies are generally trading at higher multiples than are the advertising companies like DoubleClick, which is at about 20 times estimated 2000 revenue, and 24/7 Media, which sits at about nine times 2000 revenue. "Promotions companies are pretty expensive," says Boyle.

MyPoints.com, for instance, is trading at 17 to 28 times revenue estimates, depending on the estimate one consults; FreeShop is at 31 times; and Netcentives is up to at least 62 times.

Promotions.com

(PRMO)

-- formerly

Webstakes.com

-- at about 10 times revenue is at the cheap end of this range, says Boyle.

As a rule of thumb, he says, acquirers in the online advertising business, each trading at a certain multiple of gross profit, are likely to value a target company at no more than half that multiple. Company X, trading at, say, 40 times its gross profit, would be loathe to pay more than 20 times Company Y's gross profits to pick up Company Y. Boyle has a strong buy on newly minted Promotions.com, which his firm helped take public. He has a buy on Netcentives, for which his firm was an underwriter, and which he owns personally.

To shareholders hoping for big takeover premiums, Dan MacKeigan, senior Internet analyst at

Friedman Billings Ramsey

, says that in the past, advertising companies like

AdForce

,

NetGravity

and

Flycast Communications

were all acquired at market prices. The past isn't necessarily an indication of future deals, he says, but it does suggest that investors have to consider the value of the stock that an acquiring company would use for currency. "I wouldn't think there necessarily needs to be a large premium to the sector," he says.

Separate but Equal

Also, not everyone believes that promotions companies will be taken over by online advertising companies. 24/7 Media CEO David Moore says that among traditional marketers, promotions companies have remained separate from advertising companies; he says he feels no pressure to change that in the online world. "While we certainly have thought about having that kind of capability in-house," he says, "right now we find that outsourcing that activity works fine for us."

Meanwhile, the promotions companies are proclaiming their independence. "I don't feel I have to fit in with anyone, says Netcentives CEO West Shell. Steven Krein, CEO of Promotions.com, says the whole category is ripe for consolidation, but not by someone else. "We plan to be a consolidator in the industry," he says.

That would be a nice prize for anyone.

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