SAN FRANCISCO -- If Yahoo! (YHOO) buys broadcast.com (BCST) as reports indicate, the deal makes sense in the long term, analysts say. Short-term, it could trigger a bidding war for broadcast.com and dilute Yahoo!'s earnings.
Speculation of the acquisition surfaced in
Business Week Online
last week and intensified Wednesday afternoon as
reported a deal was "imminent."
said the deal has been approved by the boards of both Yahoo! and broadcast.com. Shareholders are expected to receive 0.77 share of Yahoo! for each share of broadcast.com, valuing the deal at $5.7 billion.
"It makes perfect sense," says Peggy Ledvina, an analyst with
. "If the deal goes through, it gives them the streaming audio and video capabilities that they need to become the new-media network of the Internet."
Yahoo! declined to confirm the rumors. Both companies' stocks have been halted for news pending, and Yahoo! has scheduled a
conference call for Thursday at 8:30 a.m. EST.
Mike Wallace, an analyst with
Warburg Dillon Read
, agreed that broadcast.com's video and audio offerings would be a welcome addition to Yahoo!'s text-centric directory service. "Yahoo! is the only major company that doesn't have a high-speed video play," he says. "And now they have it."
The deal would put Yahoo! in a position to lead the market for streaming media, analysts say. "If you're a content provider and you're looking for distribution, it makes sense to go with all those Yahoo! eyeballs," Wallace says.
broadcast.com ranked as the 14th-most visited site on the Web in February, with nearly 9 million unique visitors both at home and work, according to
. Yahoo! ranked second with a tad more than 31 million unique visitors, behind top dog
. Even with broadcast.com's visitors added in, Yahoo! would remain second to AOL.
Another synergy of the deal is that Yahoo! could cross-sell broadcast.com's Webcasting services. Dain Rauscher's Ledvina said that the deal follows through on comments that Yahoo! made at a recent conference call in which the Santa Clara, Calif.-based company expressed a desire to expand its service offering. "In addition to the underlying technology, Yahoo! will get a service that they can sell on their site," says Ledvina, who adds that broadcast.com makes the bulk of its revenue through providing Webcasting and hosting services to companies.
However, analysts cautioned that the deal could dilute Yahoo!'s earnings in the short term. In contrast to its pending merger with
, Yahoo! will be more hard-pressed to squeeze out any efficiencies in the broadcast.com acquisition, analysts say.
One redundant area: Yahoo! could cut broadcast.com's marketing costs, which accounted for 25% of the company's 1998 expenses, says
BancBoston Robertson Stephens
analyst Keith Benjamin. Under the terms of the GeoCities deal, Yahoo! will exchange about 10.6 million of its shares for the 31.4 million common shares of GeoCities. In addition, Yahoo! will convert about 8.9 million GeoCities stock options into about 3 million Yahoo! stock options.
"I don't know if they're gonna be able to get the same sort of synergies as they did with GeoCities," says Wallace.
In a March 23 research bulletin,
analyst Henry Blodget cautioned that a broadcast.com deal would not necessarily be a near-term positive for Yahoo! investors. "Although Yahoo! believes the GeoCities merger, alone, will be neutral to earnings, we believe it will be more difficult (but not impossible) for the company to acquire both GeoCities and BCST and still have them be neutral to earnings," Blodget wrote.
broadcast.com lost about $5.2 million in the fourth quarter, while GeoCities lost $8.4 million. For its part, Yahoo! reported fourth-quarter net income of $18.5 million, or 16 cents per share.
Some analysts warned that the deal could spark a costly bidding contest for broadcast.com, which is the only large, high-profile streaming-media company besides
. "We believe that BCST would also be an attractive acquisition candidate for other major players," wrote Blodget. "We consider it possible that the news of the YHOO/BCST talks could trigger a bidding contest. This would make it more difficult for this acquisition to be neutral or accretive to earnings."
The Yahoo! deal has ratcheted up speculation that RealNetworks would make a juicy takeover target, but Warburg's Wallace downplayed the notion. "I don't know if it makes sense for a portal to buy them," he says. "Because if they did, other portals would be less likely to buy Real's server technology."
Some, like Ryan Jacob of the $210 million
Internet fund, say a Yahoo! buyout was just what broadcast.com needed. "If broadcast.com had to go it alone, they would've had a difficult time," says Jacob. "broadcast would have seen more competition. In our opinion, once the audience sizes get larger, they wouldn't have free access to content anymore."
Yahoo! was Jacob's second-largest holding as of year-end, according to
, but the fund has shunned broadcast.com. Still, he says, "The fact of the matter is that broadcast.com still has significant reach and I don't think it's a really bad acquisition for Yahoo!. It's not gonna materially hurt them, even if the transaction turns out badly."
Hey, what's $5 billion between friends?
-- West Coast Bureau Chief
Cory Johnson contributed to this story.