Don't be paranoid if you're a popular Internet-based company. They really are out to get you.
There's been a flurry of recent merger activity in the online space. Last week's announced acquisition of IGN by News Corp. (NYSE:NWS) and yesterday's Skype buyout are just the latest rounds of nuptials, with companies like Advertising.com, Ask Jeeves, and social networking giant MySpace.com getting gobbled up over the past year or so. Those are just the big names; smaller deals are also being cut at a frenetic pace.
CNET (NASDAQ:CNET), the dot-com eyeball collector, has been a hot topic of takeover speculation in recent months. CNET has not officially put itself up for sale, but it certainly hasn't done much to silence the rumor mills.
The company brings a lot to the table. CNET's network includes popular sites such as News.com, Gamespot.com, Download.com, and Webshots. In sum, CNET generates 100 million page views a day and reaches 115 million unique visitors every month.
The question isn't who would want CNET -- it's who can afford it. The company kicked off the week tagged with an enterprise value of $2.1 billion. With improving fundamentals, there's no reason for CNET to entertain buyout offers unless they come at reasonable premiums. It would probably take a dowry in the range of $2.5 billion to $3 billion to sweep CNET off its feet, which limits the pool of eligible bachelors. However, given the dynamics behind the usual suspects, it doesn't mean that CNET will have a shortage of potential callers. Let's go over the four most likely buyers.
Yahoo! (NASDAQ:YHOO)
It's easy to see why Yahoo! was the first name mentioned when the rumor mills started their buyout buzz back in June. The company had been looking to enter the consumer electronics information niche, and that's what CNET's namesake site is all about. However, the more one eyes CNET, the more the two companies seem to fit together like interlocking puzzle pieces.
In March, Yahoo! acquired photo-sharing site Flickr to add some depth and personality to its existing online photo galleries; Webshots would be a tremendous boost on that front. In May, Yahoo! launched a digital music subscription service. CNET's MP3.com and its Music.Download.com would ease Yahoo!'s marketing burden there while potentially beefing up its library. Furthermore, CNET's TV.com would give Yahoo! a valuable two-letter domain and fit right in with Yahoo!'s own TV.Yahoo.com subdomain.
Yahoo! and Google (NASDAQ:GOOG) have taken different approaches to growing the distribution of their popular contextual ads. Google has done it by recruiting third-party sites of all sizes to broadcast "Ads by Google," while Yahoo! has simply cultivated a hub of content on which to display its own ads. That's why Yahoo! has often been considered the front-runner in the race to purchase CNET.
Google
Why not Google? If 99% of its revenue is based on advertising -- and the company is shelling out 70% of its third-party revenue to the third-party publishers -- Google should be able to have its cake and eat it, too, with CNET's consortium of popular sites.
Google has to be considered a legitimate candidate here, if only to make sure that Yahoo! doesn't lay claim to all of CNET's daily page views. The search behemoth is also in the process of raising $4 billion in a secondary offering despite still possessing $3 billion on the balance sheet. No one is paying a premium for Google to see it rely on the interest income of $7 billion in cash. CNET would be a welcome addition to help diversify Google's portfolio without sacrificing its ad-savvy ways. (Advertising drives 99% of the Web giant's revenue.)
As a bonus, CNET also runs Search.com. In the CNET bag of tricks, it's a relatively neglected entity, but it's a juicy domain that would obviously be put to good use by a search-engine titan like Yahoo! or Google.
InterActiveCorp (NASDAQ:IACI)
Back in March, Barry Diller's eclectic media conglomerate announced a $1.9 billion deal to acquire Ask Jeeves. CNET's draws more than double Ask Jeeves' 42 million unique monthly visitors, so at least the acreage would come at a fair price to InterActive's standards.
CNET's properties stand as a sharp contrast to InterActive's collection of sites -- but that's almost the point. InterActive's power has come in collecting hip sites with a marketing angle. CitySearch sells advertising to restaurants, hotels, and other establishments on its local guides. Ticketmaster sells event tickets. HSN is, well, Home Shopping Network.
CNET has carved out a recently profitable life as a content provider, but someone like Diller could really squeeze more of the e-commerce juice out of CNET's popular (yet lightly commercialized) entities.
News Corp.
Rupert Murdoch is set to spend $1.2 billion this year in acquiring both IGN and MySpace.com parent Intermix. Even when combined with News Corp.'s own active sites that support the company's various broadcasting networks and movie studios, the company's reach of 70 million unique monthly visitors still falls short of the sizable audience that CNET would bring over.
Murdoch's empire has been migrating online, perhaps because News Corp. sees marketing budgets shifting toward cyberspace and feels that it is well-suited to capitalize on its existing presence as a major ad-seller. That's why CNET would seem to fit right in. It certainly wouldn't hurt that IGN and Gamespot are the two leading sites for diehard gamers -- or that introducing the Webshots crowd to the social-networking occupants of MySpace.com could be a promising combination.
Handicapping the buyout race
These aren't the only four logical choices in trying to marry off CNET. If conditions were different, Viacom (NYSE:VIA) and Time Warner (NYSE:TWX) could also be knocking at CNET's door. However, with one company in the process of splitting and the other being pestered by a corporate raider, neither is likely to give the bidding wheel a spin.
CNET has already risen by roughly 20% since being recommended over the summer to subscribers of the Motley Fool Rule Breakers newsletter service. The stock wasn't singled out due to its luster as a buyout candidate, though that may be its destiny unless the company becomes more vocal about maintaining its independence.
On the surface, I see Yahoo! as the best fit for CNET. InterActive and News Corp. would also jell nicely with it, though those two companies would be more likely to offer a stock-based deal over a cash purchase. However, buyouts aren't personality contests. That's why no one should be surprised if Google emerges with the top bid. Analysts would be left scratching their heads at first -- until the giant explained how much money it's been leaving on the table by not owning more content itself. With an AdSense makeover, CNET's collection of sites could be potentially even more lucrative tomorrow for Google than they are for CNET today.
CNET shouldn't be surprised if it heaves its bridal bouquet skyward only to see it land in Google's hands. A Google-CNET hookup seems to make the least operational sense -- but that's just the kind of altar mismatch that often turns out happily ever after.
What other Motley Fool Rule Breakers picks will become buyout bait at a healthy premium to their original recommended prices? Judge for yourself with a 30-day trial subscription.
Longtime Fool contributor Rick Munarriz is a fan of CNET, but he does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
