Yahoo! Inches Toward One-Stop Web Site Goal with GeoCities Buy

Responding to portal consolidation pressures, Yahoo! nabs a community builder.
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Top of the world. That is the message from

Yahoo!

(YHOO)

CEO Tim Koogle after he confirmed this morning his company was buying

GeoCities

(GCTY)

in an all-stock deal valued at $4.6 billion in Yahoo! stock and options.

In a conference call held before the market opened this morning, Koogle said the deal fits into his company's plans to assemble a Web site that is "the only place anyone in the world would want to go."

By acquiring GeoCities, Yahoo! will expand its e-commerce activities and stretch its already substantial reach among Internet users, making it even more attractive to advertisers who want to reach a large online audience. According to

Media Metrix

, about 48% of Internet users visit the Yahoo! site at least once a month, compared with 33% who visit GeoCities. Taking into account the estimated overlap among visitors to each site, the companies say that Yahoo! will end up with a 58% reach among Web users after the deal's expected close in three to four months.

The Yahoo! merger with GeoCities, which has set up the largest site on the Web at which Internet "homesteaders" can construct their own Web sites for free, offers a number of benefits, the companies said. Chief among them: promoting GeoCities services to Yahoo!'s 35 million registered users.

As an example of how Yahoo! can help GeoCities in all aspects of its operations, Gary Valenzuela, Yahoo!'s chief financial officer, said Yahoo! can substantially reduce GeoCities' cost of sales by offering in-house ad-serving technology.

Yahoo! executives said other technologies developed by Yahoo!, such as helping small merchants set up online stores, could be easily transferred to GeoCities, saving the community site the time and expense of developing those features on its own.

With Yahoo!'s help, GeoCities, whose international presence is currently limited to Japan, could leverage Yahoo!'s international sites to reach a much larger non-U.S. audiences.

Under the terms of the deal, GeoCities shareholders will receive 0.3384 Yahoo! share for each GeoCities share. (The same calculation is used to convert GeoCities options into Yahoo! options.) With 31.4 million GeoCities shares and 8.9 million options outstanding, the deal is valued at $3.6 billion worth of stock and $1 billion of options, based on Yahoo!'s closing price yesterday of 335 7/8. GeoCities shareholders will end up with less than 10% of Yahoo!'s fully diluted shares after the deal.

Executives from the two companies said there was no collar on the deal, meaning that no minimum or maximum price for GeoCities is guaranteed. There is a "substantial" breakup fee if the deal does not go through, they said.

GeoCities shareholders were to receive about a 50% premium on the closing price of their shares, which closed at 75 on Wednesday night.

GeoCities shares shot up in response to the deal, trading at 112 1/2, up 36 1/2, or 49%, at midday. Yahoo! was at 346 11/16, up 10 3/16.

GeoCities, which announced fourth-quarter results this morning, lost $19.8 million last year, or 71 cents per share, on revenue of $18.4 million.

Marc Weiss, senior technology analyst with

Amerindo Investment Advisors

, a holder of both Yahoo! and GeoCities stock, said he was optimistic about the benefits of the deal. Rival portal company

Lycos

(LCOS)

has substantially grown its an audience after acquiring community sites such as

Tripod

and

Angelfire

. "They did good with good brands," Weiss says. "Now you have two of the Web's largest brands getting together...We should see a similar, if not greater, synergy there."

Weiss was concerned that Yahoo! was coming under pressure after

America Online's

(AOL)

" announced acquisition of

Netscape

(NSCP)

and

@Home's

(ATHM) - Get Report

bid for

Excite

(XCIT)

. "I was worried about Yahoo!'s ability to do a bold move," he says. "You got a sense they had to do something next."

One big winner in the Yahoo-GeoCities deal is

CMGI

(CMGI)

, a company that invests in fledgling technology companies, just like a venture capital company. CMGI, formerly known as CMG Information Services, will now own 2.6 million Yahoo shares, or 2 1/2% to 3% of Yahoo's total shares outstanding, according to Bill White, president of CMGI's Internet Group. Yesterday afternoon that made CMGI's stake worth about $900 million.

"We're happy to have a stake in such a good company," says White, whose company is well positioned to indirectly profit from this exploding sector. Along with a number of promising private companies it has stakes in or owns, including

Reel.com

and

The Password

, CMGI holds a 20% stake in Lycos. CMGI's stock was up 9 to 111 1/2 Thursday.

Staff reporters Eric Moskowitz and Suzanne Galante contributed to this story.