Yahoo!, GeoCities Talking Merger

An announcement could be made as soon as Thursday morning.
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Mega-portal Yahoo! (YHOO) and Internet communities site GeoCities (GCTY) plan to announce a merger or other business alliance, according to three sources close to the situation.

The possible deal, which could be announced as early as 8:30 a.m. EST Thursday, would combine one of the leading all-purpose content sites with the largest community site on the Web. GeoCities, an advertising-supported site that hosts people's Web sites for free, says 3.3 million people have constructed Web pages on its site.

Joined together, the two companies could be better equipped to compete for audiences and advertisers in a rapidly consolidating online world -- one that has seen such major deals as

@Home's

(ATHM) - Get Report

proposed buyout of

Excite

(XCIT)

,

America Online's

(AOL)

impending purchase of

Netscape

(NSCP)

and

Disney's

(DIS) - Get Report

acquisition of a major stake in

Infoseek

(SEEK)

.

Reached Wednesday evening, GeoCities spokesman Bruce Zanca declined to comment on reports of a deal with Yahoo!. "It's our policy not to comment about people we might be acquiring or things that might be happening," he said.

Yahoo! executives could not be reached for comment. "All executives are at an off-site

meeting until really late tonight," said the secretary of CEO Tim Koogle. Asked about Koogle's availability Thursday, she replied, "He may get called into the meeting again tomorrow."

Yahoo! did confirm that it has scheduled a conference call with Wall Street analysts for Thursday morning at 8:30 Eastern time.

A source close to Yahoo! said that the company announced internally Wednesday night that it would merge with GeoCities in a deal valued at $4.5 billion, a 91% premium over GeoCities' market cap of $2.4 billion as of Wednesday's close. The companies could not be reached to comment on that figure.

A combination of Yahoo! and GeoCities would help Yahoo! fight off its rival

Lycos

(LCOS)

, according to Andrea Williams, an analyst at

Volpe Brown Whelan

. Lycos -- which like Yahoo! offers Internet searching, news and other features that have become standard at Internet portals -- has been building its audience by acquiring other Internet operations, such as last February's deal for

Tripod

, a GeoCities rival.

A purchase of GeoCities by Yahoo! "firmly moves

Yahoo! back into the leading position." (Williams rates Yahoo! neutral and has no underwriting relationship with the company. She has no rating on GeoCities.)

An alliance between the companies would not be their first. In December 1997, they signed a one-year deal in which Yahoo! marketed GeoCities on its site and GeoCities provided its Web-building services to Yahoo! users. As part of the deal, Yahoo! took a stake in GeoCities -- amounting to 2.6% of the company at the time of GeoCities' August IPO -- in return for $5 million worth of Yahoo! stock.

In December, 48.2% of Internet users in the U.S. visited the Yahoo! network of sites at least once, according to

Media Metrix

. That gave Yahoo! the third biggest reach, behind AOL and

Microsoft

(MSFT) - Get Report

. GeoCities was the fifth-most visited network, reaching 33.4% of the online audience.

On Wednesday, online message boards were alive with rumors of a deal between Yahoo! and GeoCities. One participant wrote, "Yahoo! does not have a bona fide communities portion like AOL or Lycos, Infoseek, etc. As there is consolidation, it make sense that Yahoo will want to strengthen itself and add on features, rather than start a huge community."

Yahoo!'s shares closed at 335 7/8 Wednesday, down 15 3/8, or 4.4%. GeoCities, whose stock jumped earlier this month, closed up 4, or 5.6%, at 75.

Flatiron Partners, which is an investor in GeoCities, is also an investor in theStreet.com.

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