The new Net religion: Get big, fast

Summary:Beyond.com's deal for BuyDirect is the latest get-big-in-a-hurry play.

Shares of Beyond.com surged 7.3 percent on news it will acquire BuyDirect.com for $133.7 million in stock, a move analysts said highlights a fundamental principal of Web merchandising: Get big fast.

The Sunnyvale, Calif., company's stock jumped 1 13/16 to 26 9/16 on volume of 1.3 million shares on the Nasdaq Stock Market. Average daily volume for the issue is 977,727. Meanwhile, the Nasdaq Composite Index gained 58.41 to 2342.01 and Morgan Stanley's high-tech 35 index jumped 42.13 to 975.40.

 
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Beyond.com (Nasdaq:BYND) said Monday morning that it would issue 5.4 million new common shares to acquire BuyDirect, a software retailer based in San Francisco.

The deal unites two of the Web's biggest software retailers at a time when online merchants are coming under increased pressure to quickly attract larger numbers of customers. "There are very clear advantages" that come with size, said Derek Brown, an analyst at Volpe Brown Whelan & Co. "I think this is a move to spur that along."

Last year, music sellers N2K (Nasdaq:NTKI) and CDnow (Nasdaq:CDNW) agreed to merge, a combination that was largely seen as a reaction to amazon.com's rapid ascension in the Internet music market. Amazon.com is also widely rumored to be plotting a serious foray into computer software sales, though analysts said the threat to Beyond.com from the Web merchandising giant is still uncertain.

"I think it's a move that Beyond.com had to take irrespective of whether Amazon was getting into the market or not," said Tonia Pankopf, a Merrill Lynch analyst.

More threats loom
Amazon.com (Nasdaq:AMZN) isn't the only potential threat looming for the company. In recent filings with the U.S. Securities and Exchange Commission, Beyond.com said it anticipates that it "may soon compete in the near future with other software publishers, including Microsoft (Nasdaq:MSFT), that plan to sell their productions directly to customers online." Competition from Microsoft could be especially painful: In its filings, Beyond.com reported that sales of products provided by Microsoft and a "major software distributor" accounted for a "substantial majority" of its revenue in 1997 and 1998.

So what does BuyDirect.com bring to Beyond.com besides another Web site that hawks many of the very same products?

For one thing, it brings added strength in the small office/home office market, the segment served by BuyDirect.com, according to Pankopf. "That's an area Beyond.com hasn't been able to crack," she said. So far Beyond.com has had the most success selling to corporate, government and consumer markets. U.S. government agencies, in fact, are its biggest customers, comprising 65 percent of the company's accounts receivable at the end of 1998.

"There's no real overlap" between Beyond.com's and BuyDirect.com's businesses, said Adam Giansiracusa, an analyst C.E. Unterberg Towbin Co. "It's a perfect union."

Analysts said BuyDirect.com has another important asset, an exclusive multiyear contract to supply subscribers of the At Home Corp. (Nasdaq:ATHM) cable modem service with software retailing services. A substantial portion of Beyond.com's and BuyDirect's business consists of software that is purchased online and then downloaded directly to a customer's computer (49 percent of Beyond.com's sales last year came from digital downloads). High-speed Internet services like @Home are expected to be a vital to the growth of digital downloading of software since they greatly accelerate the time required to receive large files.

Still, it's clear Beyond.com will need more than high-speed connections to customers to stay on top in its market. As with amazon.com, the company has sunk a fortune into advertising campaigns designed to build awareness of its brand. Between 1997 and 1998, sales and marketing expenses soared to $27.6 million from $1.7 million. Those expenses alone amounted to a whopping 75 percent of its $36.7 million in revenue last year. Net losses for 1998 were $31.1 million, or $1.65 a share.

Waiting to see
Some on Wall Street are clearly waiting to see whether the advertising blitzkrieg pays off. Pankopf, for one, has a long term rating of "buy" and a short-term rating of "neutral" on Beyond.com, "because we've had some concerns over the amount the company has spent on the sales and marketing side."

One side beneficiary of the acquisition was Internet publisher CNet (Nasdaq:CNET), which has a 16 percent stake in BuyDirect.com. CNET started BuyDirect in 1997, but spun the business off in early 1998, selling stakes to AtHome and private investors. Separately, CNet on Monday acquired AuctionGate Interactive, an online auctioneer, for $5.8 million in stock. CNet said it will use the company's auction system to help sell computers and other equipment on its Shopper.com site.

Topics: Amazon, Broadband, Government, Microsoft, Software

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