Investors prove far too Excitable
There are several ways to view the announced merger of Excite Inc. and @Home Corp., but here's the simplest: at 4 p.m. Friday, Jan. 15, these two companies had a combined market value of $15.9 billion. Then came the long holiday weekend, and the agreement by @Home to buy Excite for $106.27 per share, or a 58 percent premium over Excite's market price.
By this one move, @Home Corp. manufactured nearly $4.4 billion of market value out of thin air -- only about $2.02 billion of which represented the premium that AtHome was offering simply to acquire the Excite shares in the first place. The rest -- roughly $2.3 billion -- represents the market's collective judgment as to how much more these two companies are worth as a combined business than if left as stand-alone entities.
But does this valuation make sense? Does it make sense that these two businesses should rise by nearly 14.5 percent in value simply as a result of combining their operations under one roof? It is hard to see how.
On a combined basis, the two companies have collected a total of $151.3 million in revenues during the most recent 12-month period. On a price/sales multiple, Wall Street is thus now valuing the company at 134 times revenues, or close to three times the value of Amazon.com, which is widely cited as perhaps the most overpriced large-cap stock on Wall Street today. Now we've raised the bar even higher -- and stocks like Lycos and Infoseek are already being marked up to match it.
On an earnings basis the numbers are no better. The combined Excite-@Home operation is likely to have racked up roughly $200 million in net losses for the whole of 1998, on revenues that are not likely to have topped $220 million. Negative cash flow for the year is likely to come in far in excess of $100 million. And it is unlikely that any of these numbers will reverse themselves or improve significantly for the foreseeable future.
Such numbers do not encourage one to view a combined @Home-Excite business, with its market cap of more than $20 billion, as being rationally valued on Wall Street at the moment. But then again none of the Internet stocks are being priced at multiples that reflect their true value -- the best evidence of which being that when companies like Disney have invested in outfits like Infoseek, they've purchased stock at very steep discounts from prevailing market prices, and the selling companies have been more than willing to oblige.
The fact is, the bubble in the Internet sector is swelling so fast that it is beginning to take over the rest of the stock market. Three months ago, the 74-most widely followed stocks of the Internet sector had a combined market value equal to roughly 2.3 percent of the combined market value of the Dow Industrials. At the close of business Tuesday, the same 74 stocks were equal to more than 9 percent of the Dow.
The demand for these shares is coming directly from online and day trading firm investors, as is overwhelmingly evident to anyone who watches the activity in chat rooms. More than half Tuesday's trading in Excite consisted of transactions in amounts of 200 shares or less. Only three trades qualified as so-called institutional block trades of 10,000 shares or more.
How much longer all this goes on is anybody's guess. In some respects, the spectacle resembles nothing less than an outright riot in the streets. Only instead of outraged citizens storming their neighborhoods, throwing garbage cans through store windows and looting what's inside, we find investors in the digisphere behaving exactly the same way. For now, at least, the rampage shows no signs of abating.