Weakness in Yahoo! and Infoseek Doesn't Restrain Net Sector

Infoseek may be falling partly because of the market's distaste for established companies like Disney buying Internet companies.
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SAN FRANCISCO -- Investors' unhappiness with Infoseek's (SEEK) deal with Disney (DIS) - Get Report and continued weakness in Yahoo! (YHOO) were helping to hold back Internet stocks.

Despite losses in both Yahoo! and Infoseek,

TheStreet.com Internet Sector

index was recently trading up 3.55, or 0.5%, at 668.39.

Disney said today it will combine its

Buena Vista Internet Group

with Infoseek and create a single Internet business called

go.com

, which will be issued as a new class of stock. Under terms of the transaction, Infoseek shareholders will receive 1.15 shares of go.com for each of their Infoseek shares. Disney will have a 72% retained interest in go.com after the merger.

In a note after the deal,

PaineWebber

analyst James Preissler writes that "net-net, we believe the transaction is fairly valuing Infoseek, with an ever-so-slight bias in SEEK's favor, because of Disney Online's potentially slightly faster growing properties" than Infoseek's. He put the value of Infoseek at $52 per share, or roughly Friday's closing price of 51 1/2.

But in recent trading, Infoseek was off 2 3/4, or 5%, at 48 3/4, though it has recovered from a low of 46 as more details of the plan have been reported.

TSC's

George Mannes

will have a detailed look at the deal in an upcoming piece.

A "fair" valuation of Infoseek could be part of the reason why the stock was trading lower. Internet investors have been conditioned to expect a premium built into the price of the stock and could be disappointed that there apparently was not one in this deal. But, as Disney Chairman

Michael Eisner

just noted on

CNBC

, it could also be argued that investors built in their own premium by bidding up the stock after Disney said it was looking to expand its relationship with Infoseek in

June. Infoseek was trading in the high 30s when Disney stated its intentions of buying the portion of Infoseek it did not already own, pushing the stock above 50. Today's action could just be profit-taking by investors who bought in after that announcement was made.

The market also has not reacted well in the past to news of older, established companies like Disney buying Internet companies. There was a similar reaction when

USA Networks

(USAI) - Get Report

agreed to buy

Lycos

(LCOS)

earlier this year. That deal ended up falling apart, in part because shareholders did not feel that there was enough premium built into the purchase. By contrast, investors reacted favorably when

@Home

(ATHM) - Get Report

agreed to merge with

Excite

.

Yahoo!'s price action was perhaps the biggest drag on the sector today and a source of continued consternation. After pushing higher Thursday morning after its earnings release, the stock has performed terribly. It was off another 5 1/8, or 3.2%, at 154 7/8 in recent trading. No fresh news is accounting for the weakness, but the stock has typically retreated after its earnings reporting.