Thursday, April 1, 1999
DJIA 9794.77 +8.61 (+0.09%) S&P 500 1286.78 +0.41 (+0.03%) Nasdaq 2470.48 +9.08 (+0.37%) Russell 2000 397.36 -0.27 (-0.07%) 30-Year Bond 93 29/32 -24/32 5.67 Yield

An Investment Opinion
by Louis Corrigan

Yahoo Leverages Into Broadcast

Shares of Internet portal giant Yahoo! (Nasdaq: YHOO) and online streaming media company broadcast.com (Nasdaq: BCST) were relatively subdued this morning after the companies announced a merger that will further solidify Yahoo!'s position as a new media powerhouse. Broadcast.com shares rose $8 1/2 to $126 11/16, roughly in line with Wednesday's after-hours trading, while Yahoo! rose $4 15/16 to $173 5/16.

The deal calls for 0.7722 shares of Yahoo! to be exchanged for each share of broadcast.com. So the 36.692 million outstanding broadcast.com shares will become 28.334 million Yahoo! shares. In addition, options for 7.131 million broadcast.com shares will be exchanged for 5.507 million shares of Yahoo!. On a fully diluted basis, this $5.7 billion deal means broadcast.com shareholders will own 11% of the new company. While the price represents merely a 10% premium over broadcast.com's close Wednesday, it's a 40% premium over the 30-day average trading price and a 53% premium to the stock's $85 price tag on March 13, when Business Week reported that the companies were in merger talks. The deal includes no collar. Yahoo! also has an option to acquire 19.9% of broadcast.com, and would receive a break-up fee if the deals fall apart, suggesting that competing bids are unlikely to emerge. America Online (NYSE: AOL) was one other player said to be interested in broadcast.com.

In today's conference call, Yahoo!'s management stated that the deal, set to close in the third quarter, will be slightly dilutive to earnings in its first year but add to earnings by Q3 FY2000. Management remains comfortable with long-term operating margins in the 30% to 36% range for the new Yahoo!. That includes community website GeoCities (Nasdaq: GCTY), which Yahoo! is in the process of acquiring.

As the leading aggregator of streaming audio and video content, broadcast.com reaches some one million customers a day with everything from corporate conference calls to Internet broadcasts of programming from the BBC and Major League Baseball. Although this audience will boost Yahoo!'s online reach by 3% to 63% of all online users, the deal is really more about leveraging broadcast.com's content and relationships by means of Yahoo!'s huge distribution platform, which serves 50 million unique users each month. With a global reach, Yahoo can simply make broadcast.com's relationships with its 5,000 corporate clients more productive and, hopefully, profitable. At the same time, Yahoo! plans to use broadcast.com's managerial expertise to integrate multimedia content throughout its own current offerings.

The real question, though, is how this takes Yahoo! and the Internet generally another step closer to the concept of portals as new age media networks a la the television networks. A couple of analysts wondered if the combined company would become more interested in signing up content on an exclusive basis, as broadcast.com recently did with film distributor Trimark Holdings (Nasdaq: TMRK), or in actually acquiring content companies. That doesn't seem to be in the cards for now. Still, Yahoo! appears so well positioned as a content distributor/aggregator that it's natural to wonder if the real leverage in this deal will be seen years down the line with Yahoo! finagling equity stakes in the leading content creators. The question is who will have the power in a broadband world.


Contact lenses direct marketer 1-800 CONTACTS (Nasdaq: CTAC) cleared up $3 7/8 to $16 1/8 after the company said it expects Q1 revenues and EPS to beat current estimates because of Internet sales. "We now believe that higher-than-expected sales combined with lower-than-expected costs could result in earnings that are breakeven or better for the first quarter of 1999," said CEO Jonathan Coon. Two analysts surveyed by First Call currently anticipate a $0.12 loss.

Blood plasma expander and replacement technologies developer BioTime Inc. (Nasdaq: BTIM) flowed ahead $3 9/16 to $19 9/16 after it said last night that the FDA has approved the company's bid to market Hextend, a blood plasma volume expander used to treat hypovolemia, a condition often associated with injury- or surgery-related blood loss. BioTime's marketing partner for Hextend is Abbott Laboratories (NYSE: ABT).

Marketing firm Marketing Services Group (Nasdaq: MSGI) moved ahead $2 3/8 to $16 7/8 after it said it sold a majority interest in its Metro Fulfillment subsidiary to Crescent Media for an undisclosed sum. "MSGI... sold the majority interest to avoid any future net income erosion related to fulfillment operations," said CEO Jeremy Barbera.

Entertainment superstore retailer Hastings Entertainment (Nasdaq: HAST) hurried ahead $1 3/16 to $11 1/2 after it announced plans to launch an e-commerce site offering new and used entertainment products, books, gifts, and toys. The site is expected to go online in the next 45 days.

Meanwhile, West Coast auto retailer Lithia Motors (NYSE: LAD) drove ahead $1 to $16 7/8 after it announced plans to form an operating division to be known as "Lithia.com -- America's Car and Truck Store on the Internet.'' The company plans to offer new vehicle and parts ordering, product information links, service scheduling, and other services on the site.

Consumer electronics retailer REX Stores Corp. (NYSE: RSC) pocketed $1 7/8 to $13 7/16 after it said it will sell audio and video equipment on Amazon.com's (Nasdaq: AMZN) auction service. REX Stores is using the Amazon partnership as an initial test of its e-commerce strategy. Online retailer CyberShop (Nasdaq: CYSP) cyber-bagged $1 1/16 to $15 9/16 after a similar announcement.

Baby Bell SBC Communications (NYSE: SBC) rose $1 3/4 to $48 15/16 after J.P. Morgan raised its rating on the company's stock to "buy" from "long-term buy," irrespective of whether the company's merger with Ameritech Corp. (NYSE: AIT), plans for which were announced in May, is approved. Lehman Brothers upgraded the stock to "buy" from "neutral," setting a $60 per share 12-month price target.

Lighting systems designer SLI Inc. (NYSE: SLI) brightened $1 1/4 to $22 1/4 after saying it will resume a stock buyback program through open market purchases. No specific number of shares or dollar amounts were mentioned in the company's statement.

ZDNet (NYSE: ZDZ), the tracking stock for the Internet-related businesses of information technology media and marketing company Ziff-Davis (NYSE: ZD), took $2 7/8 to $38 7/8 after adding $17 yesterday in its first day of trading. Ziff-Davis fell $1 7/16 to $20 1/16 after dropping $7 1/2 yesterday.

Paper, lumber, and other wood products company Mead Corp. (NYSE: MEA) recorded gains of $1 11/16 to $32 7/16 after Morgan Stanley Dean Witter boosted its rating on the stock to "strong buy" from "outperform." Analyst Matthew Berler's 12-to-24 month target price is $45 per share.


Visual and high-performance computing systems maker Silicon Graphics (NYSE: SGI) sank $3 1/8 to $13 7/16 after warning that delays and problems associated with transitions to new product lines will result in a fiscal Q3 loss $0.20 to $0.25 per share greater than the loss of $0.07 per share previously forecasted by analysts surveyed by First Call. Strangely, Silicon Graphic's shares rose 16% yesterday prior to the announcement, perhaps as traders expected good news for the company.

Integrated oil and gas firm BP Amoco (NYSE: BPA) slipped $3 5/8 to $97 3/8 after ending days of speculation and finally announcing a deal to acquire Atlantic Richfield (NYSE: ARC) for $26.8 billion in stock. BP Amoco CEO John Browne said he expects the combination will yield $1 billion in annualized cost savings by 2001. ARCO edged up $1/8 to $73 1/4 on the news.

Irish enterprise middleware developer IONA Technologies (Nasdaq: IONA) slumped $15 5/8 to $14 3/4 after saying higher expenses and delayed orders will result in Q1 results ranging from a loss of $0.03 per share to breakeven, short of the First Call mean earnings estimate of $0.18 per share.

Enterprise document management systems developer Documentum (Nasdaq: DCTM) slowed $6 7/16 to $10 7/8 after saying weak customer demand for its products will result in "substantially" lower Q1 license sales compared to a year ago and a "significant" operating loss for the period. The First Call mean estimate had called for earnings of $0.14 per share.

Branded natural food and beverages maker Balance Bar Co. (Nasdaq: BBAR) was knocked off-kilter by a $3 11/32 loss to $6 15/32 after saying higher-than-expected seasonality for its energy bars will lead to Q1 EPS between $0.05 and $0.06, down from last year's $0.11 and roughly half of the First Call mean estimate of $0.12.

Enterprise network security products provider Secure Computing (Nasdaq: SCUR) was thrown for a $4 3/4 loss to $5 3/4 after saying seasonality, a lengthening of the sales cycle, and delays in closing "several large transactions" will lead to a roughly 38% year-on-year decline in Q1 revenues and a loss of $0.30 per share (excluding charges). Analysts had been expecting earnings of $0.10 per share in the period.

Pharmaceutical marketing services provider Access Worldwide Communications (Nasdaq: AWWC) slid $1 1/2 to $6 1/4 after saying lower-than-expected revenues and operational difficulties at a recently expanded business unit will lead to Q1 EPS between breakeven and $0.03, down from $0.07 a year ago. Access also said it has hired Bear Stearns to explore strategic alternatives, including a possible sale of the company.

Business computer security services firm Axent Technologies (Nasdaq: AXNT) lost another $2 13/16 to $21 1/4 after falling 26% yesterday on announcing a plan to acquire UK-based PassGo Technologies in exchange for approximately 1.5 million shares of company stock, or about $50 million.


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