Talk of Excite Leaving @Home Riles Wall Street

Speculation is growing that the content arm of the company is being eyed by AOL and others.
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SAN FRANCISCO --

Excite@Home

(ATHM) - Get Report

is under increasing pressure to split itself into two companies, undoing a merger completed just four months ago, according to four investment bankers and money managers.

The pressure comes as speculation mounts that

America Online

(AOL)

is interested in buying the Excite portal business and striking a broadband distribution alliance with

AT&T

(T) - Get Report

, which owns a majority of Excite@Home's voting shares.

On Wednesday,

Bloomberg

and

CNBC

, among others, reported on the speculation that AOL would acquire Excite, which pushed up Excite@Home's stock 13%. Those reports followed one posted by

Streetadvisor.com

, a financial news site, on Sept. 25. And earlier this summer, reports said

Yahoo!

(YHOO)

was in talks to buy Excite.

Excite@Home declined to comment on the latest rumblings. AOL couldn't be reached for comment. AT&T spokesman Andrew Johnson denied rumors of a deal. "When I saw the news come over the wire I kind of scratched my head and said, 'What's going on?'" says Johnson. "I would normally get some inkling of it."

Many on Wall Street think this time the talk is more than your garden-variety bulletin board rumormongering.

CIBC World Markets

and

Merrill Lynch

both published research bulletins Wednesday bolstering the speculation.

"We believe that such a transaction makes sense for both," wrote

Merrill Lynch

analyst Henry Blodget. (Merrill helped underwrite @Home's 1997 IPO and acted as an adviser to @Home in its merger with Excite.)

Splitting the company into a content part (i.e. Excite) and a conduit part (i.e. @Home) would strengthen @Home's hand, wrote Blodget, because it would resolve the company's regulatory problems and put it in a better position to strike other deals with cable operators for set-top boxes. Blodget wrote that Merrill could neither deny nor confirm the speculation.

CIBC analyst John Michael Segrich wrote that a deal between AT&T and AOL is "highly likely (90% probability in our opinion)," and may occur in the "near term." (CIBC has no underwriting relationship with Excite@Home.)

Although AT&T controls 58% of Excite@Home's voting rights, it must garner the support of other board members such as

Cox Communications

(COX)

to take a big step like breaking up the company. Cox spokeswoman Amy Cohn declined to speculate on the rumors, but said that "we think content and distribution make sense and that's why we're supportive of their being one company."

AT&T broadband exec Leo Hindery has argued that the Excite acquisition runs counter to Ma Bell's stance of staying out of the content business. But Excite@Home CEO Tom Jermoluk has said he wants to keep the company together to compete against AOL.

A money manager who has no position in Excite@Home and who asked not to be named, says that, increasingly, AT&T and its cable partners are losing patience with the combined firm. "They're saying, 'We're spending all this money and we have to be hooked up to this one content partner,'" he comments.

In hindsight, a hint that Excite@Home might be split up came on Monday, when the company issued a release saying it was organizing its operations into two major divisions: Media & Marketing Services, focused on content and sales; and Subscriber Networks, which includes the @Home and @Work products.

Four people interviewed say they expect that AT&T and its cable partners would want to retain control of the network side of Excite@Home, that is, @Home's original business. The question, then, would be what company would want the former Excite.

One investment banker, whose firm has no underwriting relationship with Excite@Home, says he doubts Excite would go to AOL or Yahoo!. Rather, the most likely candidates are traditional media companies such as Barry Diller's

USA Networks

(USAI) - Get Report

and the soon-to-be-combined

Viacom

(VIA) - Get Report

and

CBS

(CBS) - Get Report

.

Viacom and CBS could use Excite to build a major portal, similar to what

Disney

(DIS) - Get Report

has done with

Infoseek

and

NBC

has done with

Snap.com

. And for Diller, Excite might be a good substitute for

Lycos

(LCOS)

, a company it tried unsuccessfully to buy this year. It has the kind of extensive shopping area that Diller coveted in Lycos. "Why

wouldn't

Barry Diller make a run at Excite?" the banker asks.