Property Values Soar for Net Communities

Yahoo!'s acquisition of GeoCities is making community sites a must-have for portals.
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SAN FRANCISCO -- Just as Microsoft's (MSFT) - Get Report December 1997 acquisition of Hotmail bumped up the demand for free email providers, Yahoo!'s (YHOO) acquisition of GeoCities (GCTY) is likely going to up the demand for online communities.

The need for a place called home has fueled the growth of many community sites on the Internet. From giants like

America Online

(AOL)

to small fry like

The Well

, Internet communities offer people a space to express themselves through posting their personal home pages or by chatting with others. This need to be heard and seen online has helped several companies to get soaked up in acquisition deals or to be ushered down Wall Street's aisle.

Buying a community instead of building one isn't new. In addition to Yahoo!'s $3.56 billion acquisition of GeoCities Thursday,

Lycos

(LCOS)

acquired a handful of players including

WhoWhere?

for $133 million in stock and

GuestWorld

for $3.9 million in stock last August. And as part of the WhoWhere? deal, Lycos gained control of

AngelFire

, another community site, and

mailcity

, a free email provider. Last February, Lycos also bought

Tripod

, one of GeoCities' main competitors at that time, for $58 million in stock.

Meanwhile, new competitors have popped up.

Xoom.com

(XMCM)

launched its IPO Dec. 9, and

theglobe.com

(TGLO)

jumped into the public realm Nov. 16.

Now Xoom.com and theglobe.com are suddenly hot candidates for takeovers. Xoom.com was up 23% to 49 1/2 Thursday, pushing its market cap to $650 million, while theglobe.com was up 24% at 49 with a market cap of about $500 million.

"We're still being put in the basket of community sites, but if you really look at the revenue -- the ultimate expression of your business -- we're an e-commerce company," says Xoom.com Chairman Chris Kitze. "Yahoo! laying out this kind of money says that there's real value here. But we think we've got even more

value. The main message is: Yeah, we're a Web community, but we think we've got a better mousetrap."

What about Xoom.com's independence? "With all the consolidation going on right now, there is no question that there's going to be a lot more companies acquired," says Kitze. "I'm not afraid to sell a company, but I'm not going to run out and sell when we have a lot of headroom in our own business."

Yahoo!'s buyout of GeoCities is both a positive and a negative, says Michael Wallace, an analyst at

Warburg Dillon Read

, who rates Yahoo! and Lycos buy and whose firm has no underwriting relationship with either. "It's a positive because it puts a value on what communities are worth and a negative because it ups the competitive landscape."

Acquisition has been one of the main drivers of growing reach for Lycos. Its properties, Tripod and AngelFire, ranked 12th and 14th in reach, respectively, according to

Media Metrix's

December numbers. Lycos' community sites, together with its other properties, put the Lycos network in fourth place.

GeoCities should expand Yahoo!'s reach in a similar way. After the merger, Yahoo! could fetch at least 10% over Yahoo!'s reach, said Yahoo! CEO Tim Koogle in a conference call Thursday morning. That would boost Yahoo!'s reach to nearly 60%, compared with Lycos' overall reach of 46.5%. The bigger the reach, the more appealing the site is to advertisers.

"This reinforces the importance of online communities," says Stephan Paternot, co-CEO and co-president of theglobe.com. "When Lycos acquired Tripod, it diminished some of their identity," so this should heighten the awareness of theglobe.com as GeoCities gets swallowed by Yahoo!. But Wallace disagrees. "Under Yahoo!," says Wallace, "GeoCities will increase the rate of growth and extend their lead in the community space."

Who might be interested in buying the remaining independent community sites? Perhaps Microsoft would want to beef up its online network, or maybe

Disney

(DIS) - Get Report

would want to round out its new portal with more community sites. Microsoft's sites ranked second and Disney ranked eighth in December, according to Media Metrix. Wallace says that AOL is trying to build community on its own site, and so is

Excite

(XCIT)

, which

last week agreed to be bought by

@Home

(ATHM) - Get Report

. "Excite is trying to build

community on its own," says Wallace. "If it's more critical to get there quicker, then they might just buy."

Theglobe.com's Paternot says the company is looking for partnerships and acquisitions to improve the site's content, e-commerce efforts and branding. "The best way to grow is by aligning ourselves with big media partners," he says. Paternot wouldn't comment on any takeover prospects.

Others feel a takeover of theglobe.com may just be a matter of time. "Theglobe.com by far is the most appealing Internet stock right now," says Mark Zinn, a trader at

Capital Partners

who bought TGLO yesterday and is still holding it. "There is consolidation in the air, and they are a prime addition. Anyone that doesn't have a community presence won't make it."