Thursday, June 24, 1999

Go2Net Inc.
(Nasdaq: GNET)
Phone: 206-447-1595
Website: www.go2net.com
Price (6/23/99): $146*
*A 2-for-1 stock split will be reflected in the stock price on June 25.

In tennis, players who frequently rush the net to press an advantage eventually get the ball slammed down their throats. Niche Internet portal Go2Net (Nasdaq: GNET) stockholders know the feeling. Despite its perils, though, rushing the Net sometimes makes cents -- or maybe even $100 bills.

After drifting down to $6 1/2 per share last September amidst the market turmoil, Go2Net stock doubled. Then it doubled again. And again. And again. Going to Go2Net was working big time for investors, with the score "Love-30" (baggers, that is).

Thanks to profitable Q2 earnings, the stock topped out at $199 per share in April before the end of the spring Net rally sent investors running for cover. Although Go2Net has had a deuce of a time the last two months, it's still a nifty ten-bagger since fellow Fool Rick Munarriz wrote an analysis of the company last August.

Go2Net's multiple rallies benefited from euphoric Internet fans, but the stock's swift moves followed a number of sweet deals. In early January, for instance, the company acquired Web21, a firm that attracts more than a million unique surfers per month to its 100hot.com ranking of the Net's top sites.

"Fandemonium" really set in after Paul Allen, the billionaire co-founder of Microsoft (Nasdaq: MSFT) and major "Wired World" investor, announced that his Vulcan Ventures would acquire $300 million worth of Go2Net convertible preferred stock. Allen also said he would buy 1.4 million shares of common stock from Go2Net's officers and directors while launching a tender offer for another 3.6 million shares at $90 apiece to gain majority control of the firm. The stock had closed the previous business day at $87.

Investors smashed that lob for a quick 30% one-day gain, figuring Go2Net might be more valuable than they thought now that Allen was on board. With such powerful topspin and a strong earnings report on April 22, Go2Net soon hit its all-time high.


Formed late in 1996 by now 32-year-old CEO Russell Horowitz and president John Keister, Go2Net has been public since 1997. The Seattle-based company runs a network of websites focused on personal finance (Silicon Investor and StockSite), search (MetaCrawler), commerce (HyperMart and WebMarket), auctions (Haggle Online), and games (PlaySite).

A year ago, Go2Net stood at #77 on Media Metrix's (Nasdaq: MMXI) parade of most-visited websites. From January to April, it rose from #24 to #19. Its reach increased by 11% between March and April, a period when other portals saw actual dips in traffic. It now reaches 36% of Web users.

The company has grown through constant stock-for-stock acquisitions. In late April, it bought Virtual Avenue for $23 million in stock, considerably beefing up its HyperMart business, which offers free Web-hosting services for small- and medium-size businesses. HyperMart now claims more than 235,000 members and is adding 1,000 new members each day.

In May, Go2Net traded $20 million of its stock for IQC.com, which offers advanced, Java-based real-time stock charting services. Some parts of IQC will be worked into Go2Net's other financial sites, while IQC's most advanced package will remain available via monthly subscription.

After Vulcan's initial $167 million preferred investment, insiders owned 4.33 million shares or 27% of the stock, while Vulcan controlled another 16%. Following the June 17 shareowner approval of Vulcan's purchase of another $133 million in convertible preferred and the 1.4 million shares sold to Allen by insiders (36% of their holdings), Vulcan now controls 34% of the company.


Income Statement*
12-month sales: $9.1 million
12-month income: $0.62 million
12-month EPS: ($0.05)
Profit Margin: 6.8%
Market Cap: $2,439.7 million (Based on 16.71 million shares)
(*Pro forma, excluding acquisition charges and one-time non-cash dividend payment related to Vulcan Ventures' investment. Fully diluted shares include Vulcan's initial $167 million investment only. The loss per share reflects fewer shares outstanding during FY98 losses and more during FY99 gains.)

Balance Sheet*
Cash: $179.2 million
Current Assets: $177.7 million
Current Liabilities: $3.5 million
Long-Term Debt: None
(*Cash includes $5 million in long-term investments, but only the initial Vulcan investment of $167 million. Including the second tranche, the company has roughly $312 million in cash.)

Price-to-earnings: N/A
Price-to-sales: 268.1


In case you've been sleeping under a rock, Internet portals -- sites like Yahoo! (Nasdaq: YHOO), Lycos (Nasdaq: LCOS), and InfoSeek (Nasdaq: SEEK) that aggregate diverse online content by linking together a network of useful sites -- have been all the rage for the last two years.

These companies have been acquiring content and community sites while inking marketing deals with other players to give customers a reason to use their portals as a home base for exploring the Web. Portals that gather regular customers and keep them on the networks the longest can attract higher ad revenues. Traditional media companies like General Electric's (NYSE: GE) NBC, Disney (NYSE: DIS), and CBS (NYSE: CBS) have been trying to buy into or develop a network of sites that can serve as either general interest portals or niche portals, as they prepare for the convergence of the Internet and TV.

Go2Net has been playing this same game and making some savvy deals. The May 1998 acquisition of Silicon Investor, the heavily trafficked subscription-based stock discussion forum, should have been a watershed for investors looking at this company. Horowitz was clearly interested in quality, community-oriented sites that have a working business model. And getting SI for just $35 million in stock was a steal.

Moreover, as Rick pointed out last summer, Go2Net turned profitable last June on soaring (up 509%) but still tiny revenues of $1.33 million. Go2Net had also licensed its game technology to Lycos and Internet service provider EarthLink (Nasdaq: ELNK).

Knowing what to pay for such a company is, of course, challenging. Clearly, it didn't deserve a Yahoo!-type premium, but the market was valuing Go2Net at around $150 million last summer, a price that seems ridiculously cheap for a company now poised to crack the Media Metrix Top 10.


High-flying Internet stocks should be expected to fall 50% from time to time because they often trade based on investor psychology, and valuing them is just so tricky and can be altered so dramatically by shifting assumptions. After Go2Net's astonishing run, some pullback was probably inevitable.

But what's it worth now? Well, one reading of the Allen deal is negative. First, insiders happily cashed out a third of their shares for just $90 apiece. They must think that's a pretty fair price. Second, Allen's $300 million preferred stock investment allows him to acquire 4.54 million shares of common stock for just $66.11 per share. While that's well above what the stock had been trading for in early March, it nonetheless represented a 24% discount to the market price when the deal was signed. Usually shareowners expect a premium for ceding control to a third party.

Of course, this would have been a complete misreading of the deal. For starters, Allen's tender offer gave average shareowners a chance to accept the same deal management got. No one did, but at least the offer was on the table. Second, it's unlikely Go2Net could have managed to raise anywhere near as much financing at such a good price from a public follow-on offering. More important, Allen is the kind of strategic investor that changes the game for a company.

Through his Charter Communications, Allen is now the fourth-largest operator of cable systems, with 5.5 million subscribers. He also owns a controlling stake in High Speed Access Corp. (Nasdaq: HSAC), a company that will provide broadband Internet access to many of Charter's cable customers. In turn, it's now clear that Go2Net will be the primary content platform for these cable customers.

In other words, Allen is preparing a comprehensive broadband offering similar to the package provided by Excite@Home (Nasdaq: ATHM) and its cable partners. And Go2Net's network of content, community, and commerce sites is a crucial part of that offering.

Allen's diverse investments also present Go2Net with many opportunities to form mutually beneficial partnerships. For example, Go2Net announced on June 10 that it was creating a "group-buying" shopping site using the patent-pending technology of Mercata, part of Allen's keiretsu, or interlocking network of businesses. The site harnesses the collective buying power of Web consumers, dropping the price of a highlighted item in real time over a period of hours or days as more people agree to buy it.

Also, Allen has made major investments recently in #4 online broker Datek and its subsidiary, Island, the #2 electronic communications network (ECN), which along with Instinet is transforming stock market trading. Silicon Investor will soon relaunch its site, and it's not hard to imagine it offering a rich combination of content via Stock Site, professional charting via IQC, community via SI's message boards and chat, and brokerage service via Datek.

Putting a value on Go2Net is still a challenge, but the company's huge cash position and alliance with Allen suggests it now deserves a premium. Better yet, it's obvious that Allen's now-withdrawn $90 per share tender offer has provided a floor to the stock price, since investors figure that offer could be renewed were the stock to fall below that threshold. Few Net stocks can offer that kind of insurance policy. These shares, and the rest of Allen's growing empire, are worth a closer look.

-- Louis Corrigan (TMFSeymor@aol.com)

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