Yahoo! buys GeoCities, resets strategy

Summary:Yahoo! says deal will enhance it as a 'leading global branded Web network.'

Updated at 10:30 AM PT

In the latest twist in the Internet consolidation movement, Yahoo! Inc. said Thursday it will acquire GeoCities Inc. in a stock swap valued at $3.56 billion. Yahoo! said the acquisition will be neutral to earnings in the third and fourth quarters of 1999 and add to earnings in 2000.

Yahoo! (Nasdaq:YHOO) rose 15 1/8 to 351 and GeoCities (Nasdaq:GCTY) soared 37 15/16 to 112 15/16.

"This is a very substantial and very strategic acquisition for us," said Yahoo! CEO Tim Koogle, on a conference call with analysts. "This will help us accelerate our company's leadership position."

Under the terms of the deal, Yahoo! will swap each share of GeoCities for 0.3384 shares of Yahoo!. That would value the deal at $3.5 billion, or $113.66 a share, based on Wednesday's closing price -- a 51.5 percent premium. All outstanding GeoCities options would be converted to Yahoo! options. Including options, the merger is valued at $4.6 billion.

Gary Valenzuela, Yahoo!'s chief financial officer, said the premium was worth it. The shares Yahoo! will issue to buy GeoCities will represent less than 10 percent of the company's diluted shares outstanding.

Earlier, Paine Webber began coverage of Yahoo! at "neutral" with a 52-week share price target at $170.

Yahoo! holds a minority interest in GeoCities (financials), and has a wide-ranging cross-promotional relationship. In addition, Japan's Softbank Corp. has a large investment in both companies. Softbank is the parent of Ziff-Davis Inc. (NYSE:ZD), which operates ZDNet.

A week of heated talks
Koogle said talks between the two companies heated up about a week ago. GeoCities, which went public in August became eligible for the favorable pooling of interest accounting earlier this month.

Yahoo! said it will take a charge in its second quarter, when the acquisition closes.

The move boosts Yahoo! reach numbers, which have been under scrutiny as Lycos Inc. (Nasdaq:LCOS) and other competitors have boosted their reach with acquisitions.


According to Yahoo!, the company will now be the second largest property on the Web with a combined unduplicated home/work reach topping 58 percent.

Strategy shift
On a conference call following its earnings release, Yahoo! officials had alluded to possible acquisitions. But Yahoo! in the past has typically bought smaller Web properties and integrated them into Yahoo!.

With the purchase of GeoCities, Yahoo! appears to be taking the network strategy employed by Lycos and Infoseek Corp. (Nasdaq:SEEK), which has a joint venture with Disney (NYSE:DIS), the Go.com network.

"This deal is particularly noteworthy in that it marks a dramatic shift in Yahoo!'s strategy," said Volpe Brown Whelan analyst Andrea Williams. "Up to this point, the company has focused on building its own brand."

Jeff Mallett, chief operating officer for Yahoo!, said the company could acquire more established entities.

"We do expect that going forward we will acquire brands that will be tucked in under the umbrella brand," said Mallett. "We will move away from descriptive brands. It's a shift in approach."

Mallett noted that the combined companies would be marketed as Yahoo! GeoCities.

Consolidation trend
Yahoo!'s acquisition of GeoCities is a part of a larger Internet consolidation movement.

America Online Inc.'s (NYSE:AOL) acquisition of Netscape Communications Corp. (Nasdaq:NSCP) kicked things off late last year.

At Home Inc. (Nasdaq:ATHM) then bought Excite Inc. (Nasdaq:XCIT) to form a rival to AOL. There has also been plenty of speculation revolving around Lycos.

Analysts predicted the consolidation trend, but may be a bit surprised so much consolidation is all happening before February.

"We expected a new round of acceleration," said AOL CEO Steve Case, in a conference call Wednesday. "It is clearly accelerating."

What Yahoo! is getting
Yahoo! officials were confident they could "monetize" GeoCities' 3.5 million homesteaders. Jeff Mallett, chief operating officer for Yahoo!, said the synergies would be obvious quickly because the two companies have worked together and many features will be "bolt on" services.

Yahoo! will integrate GeoCities personal publishing tools across its sites in the U.S. and abroad. GeoCities, which was trying to add features, will be able to plug Yahoo!'s mail, shopping and other services.

But the profitable Yahoo! is also inheriting some losses.

Separately, GeoCities reported a fourth quarter loss of $8.4 million, or 27 cents a share. Wall Street was expecting a loss of 34 cents a share.

Revenue for the quarter was $7.5 million, up 42 percent from the third quarter. In December, GeoCities said traffic was an average of 53 million page a day, compared to 44.8 million page views per day in September.

Yahoo!, which reported strong e-commerce growth in its latest quarter, is likely to take advantage of the new reach to expand its revenue. Yahoo!'s e-commerce revenue was up 38 percent sequentially in the fourth quarter. In America Online Inc.'s (NYSE:AOL) latest quarter, e-commerce revenue was up 22 percent sequentially.

Williams said Yahoo! is likely to drive traffic into its portal from GeoCities.

"Although community sites have a high number of loyal users, it is relatively more difficult to generate revenue at community sites," said Williams. "Yahoo! would be able to drive GeoCities traffic to revenue producing areas of its own site. This strategy has been very effective for Lycos, which acquired both Tripod and Angel Fire during 1998."

Another analyst also said Yahoo! could blend community and commerce. "What Yahoo! is trying to so is build community," said Arthur Newman, analyst at Gerard Klauer Mattison. "Yahoo! has proven very proficient at developing electronic commerce."

Winners and losers
As far as stock winners go, Xoom.com Inc. (Nasdaq:XMCM) and theglobe.com Inc. (Nasdaq:TGLO) are the first choices. Now that GeoCities is off the market, most of the major community sites are owned by a bigger company.

Investors are sure to speculate that second fiddles such as Xoom.com and theglobe.com won't be independent for long. Sure enough, Xoom.com shares were up 9 3/4 to 49 5/16 and theglobe.com jumped 9 7/16 to 48 15/16 in early trading.

Another winner of note, will be CMGi Inc. (Nasdaq:CMGI). This company, which acts as a quasi-venture capital firm, owns a nice chunk of GeoCities and will profit from the acquisition.

When the deal is complete, CMGi is sitting pretty with sizeable holdings in Yahoo! and Lycos. CMGi also owns a nice stake in Amazon.com Inc. (Nasdaq:AMZN). CMGi was up 11 5/8 to 114 1/8.

Topics: Amazon, E-Commerce

About

Larry Dignan is Editor in Chief of ZDNet and SmartPlanet as well as Editorial Director of ZDNet's sister site TechRepublic. He was most recently Executive Editor of News and Blogs at ZDNet. Prior to that he was executive news editor at eWeek and news editor at Baseline. He also served as the East Coast news editor and finance editor at CN... Full Bio

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