"I've really got to use my imagination," Gladys Knight & the Pips once sang. "I've got to make the best of a bad situation."
Well, it looks as if two modern-day women, of a sort --
-- are looking to Knight as a role model.
The two struggling operations announced Monday night
a deal for iVillage to acquire Women.com. On the one hand, when the deal was announced, Women.com shareholders appeared to be getting less than market value for their shares. On the other, it doesn't appear that iVillage's financial outlook will particularly improve thanks to Women.com. But, say analysts, the hard-to-follow deal the companies have put together seems like their best shot at survival.
By Tuesday's close, iVillage rose 66 cents to close at $2.38, while Women.com was unchanged at 72 cents.
The transaction illustrates the tough challenges faced by content verticals -- sites focused on specific groups of users -- as discussed Sunday on
here. Not only do these verticals have to keep their businesses healthy amid the Wall Street financing drought, but they also have to turn their companies back into stories that investors can get excited about. As a sign of how Women.com was in danger of falling off the map, so to speak, the company received a letter from the Nasdaq a month ago threatening delisting because the company's shares were trading below a dollar. Women.com, which went public in October 1999, hit $22 one month later, its all-time high.
iVillage will be paying Women.com shareholders 0.322 shares of iVillage stock for each of their shares, which, given iVillage's Tuesday run-up, implied a value of 78 cents Tuesday for each of Women.com's 72-cent shares. At the time the deal was announced, it looked as if Women.com shareholders were going to get only 55 cents worth of iVillage stock for their own shares.
There's a cash element to the purchase, too, but an oddly small one: $250,000. Divide that among Women.com's 47 million shares outstanding as of last November, and you get a half-cent per share in cash, or 50 cents per every 100 shares. It hardly seems worth the trouble, but Scott Levine, chief financial officer of iVillage, says the cash was included in the transaction so the deal would qualify as taxable, in tune with the sellers' wishes.
Though details are incomplete on other aspects of the deal, it's clear that the privately held
, which holds a 46% stake in Women.com, isn't exactly cashing out on the deal and running gleefully to the bank. Through a rights offering, Hearst and other shareholders of Women.com will have the opportunity to invest $20 million in exchange for approximately 9.3 million shares of iVillage, and warrants to purchase an additional 2.1 million shares. If the other Women.com shareholders don't step up to buy the percentage of the deal alloted to them, Hearst has agreed to buy the portions set aside for them.
"Hearst would like to show a commitment to the space," says Levine, explaining the genesis of the rights offering. "It was felt that a cash contribution on their part would go a long way." The offering was extended to cover all other Women.com shareholders to prevent anyone's complaint that the transaction with Hearst might be unfair. "Nobody wanted it to appear they were taking advantage," Levine says.
A Hearst spokeswoman didn't immediately respond to a request for comment.
Hearst also has committed to purchase, in cash, somewhere from $15 million to $21 million in production and advertising services from iVillage over three years.
Hearst needs to have some sort of Internet presence," says Kathleen Heaney, Internet analyst with
. "Hearst has obviously decided they can't do it on their own, or they don't want to." Heaney, whose firm hasn't done underwriting for either company, has a neutral rating on both.
Though it appears that iVillage shareholders' stake in the company will be diluted, that's only a problem, as she puts it, in the real world. "I don't know if we're operating in the real world," she says. "It becomes a choice of survivability."
She adds, "It's better to be bigger. ... I would trade off the dilution to know there's still a viable business around."
Yet Heaney acknowledges the business will be rough for the foreseeable future, a view shared by Paul Noglows, Internet analyst at
J.P. Morgan H&Q
. In a note issued Tuesday morning, Noglows pointed out that iVillage's revenues fell 8% sequentially from the third quarter of 2000 to the fourth quarter, and the company expects revenues will fall another 25% to 35% sequentially in the first quarter of 2001.
Women.com, meanwhile reported a 28% sequential decline in revenues from the second quarter to the third quarter of 2000. "To be sure, the dot-com collapse should be finished by later this year, and ad spending should pick up," Noglows writes. "But it may be aggressive at this point to assume that women-focused Internet media benefits this year from these factors." Noglows has a market performer rating on iVillage, and his firm has been an underwriter for the company.
Of course, as with at so many other Internet companies, cost savings, in the form of layoffs, are likely in the wings. Levine declined to address the possibility of layoffs, saying the company would give more specific information about cost savings and financial projections at the end of February or in early March. "We'll look at both companies and figure out where there's best of breed," says Levine, "and we'll take what works."