January 26, 1999 9:40 AM PST

Compaq spins off AltaVista

Compaq Computer today said it will spin off its Web directory AltaVista to create a wholly owned subsidiary, the AltaVista Company, which it intends to take public within a year.

In conjunction with this announcement, software giant Microsoft today said it will license its MSN online communications technologies--built on the MSN Hotmail Web-based email service--to the newly created AltaVista Company. After making the announcement, Microsoft also said that MSN will phase out the Inktomi search engine as its primary search platform and replace it a search engine powered by AltaVista.

"We are taking a major step to leverage the value of one of the premier assets we acquired" with the purchase of Digital Equipment last year, Compaq chief executive Eckhard Pfeiffer said at a press conference. "It is clearly our intent to take it public.



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"By creating a separate publicly traded company, we will unlock AltaVista's tremendous value for Compaq shareholders," Pfeiffer added.

As reported earlier, today's announcement comes two weeks after Compaq acquired Shopping.com for $220 million in stock, a purchase aimed at further building out AltaVista by integrating Shopping.com's e-commerce capabilities. However, Compaq later lowered its original $19 per share offer to $18.25 per share, following a renegotiation of the deal.

The announcement comes during a period when Internet stocks have been skyrocketing, with Web portals enjoying some of the highest valuations. @Home last week acquired Excite for $6.7 billion in a stock deal, while in November 1998, America Online paid $4.2 billion for Netscape Communications.

Spinning off AltaVista is part of Compaq's strategy to be one of the leading companies in delivering Internet services as well as selling Compaq machines via the Web, Pfeiffer said.

"We expect the Internet market for content and services to reach $170 billion by 2002, making it larger than the entire PC market today," he said.

Compaq plans to capitalize on its worldwide PC market leadership, along with its relationship with AltaVista, to capture a large percentage of this market, the company said.

Shares of Compaq jumped higher, rising 6.02 percent to 49.5. The stock has traded as high as 50.25 and as low as 22.94 during the past 52 weeks.

Pfeiffer named Rod Schrock as president and chief executive of AltaVista, which will be headquartered in Palo Alto, California. Until now, Schrock was senior vice president of Compaq's Consumer Product Group, which he helped establish as a powerhouse in the home PC market. He also launched Compaq's Presario Internet PCs, which linked to AltaVista, driving more than 20 million user visits to the AltaVista destination per month, according to Compaq.

Compaq has fully capitalized AltaVista to allow it to operate "comfortably" for the first year, Schrock said.

"The IPO will be designed to provide sufficient cash to perform acquisitions to further develop the AltaVista site," he added.

This is not the first time plans have been laid to spin off AltaVista in pursuit of an initial public offering. In August 1996, then-parent company Digital Equipment filed with the Securities and Exchange Commission to take AltaVista public. However, the following June Digital canceled its IPO plans for AltaVista due to a restructuring at Digital and an overall cooling of the Internet IPO market.

Schrock said AltaVista had a run rate of slightly more than $50 million per year after the fourth quarter of 1998. He said he anticipates that the newly formed company will have a run rate nearly two to three times greater by the end of the fourth quarter of 1999.

Stock movement in the portal space has led to widespread speculation about which portal is next in line for an acquisition or other major deal. Though Lycos was rumored to be partially on the block, chief executive Bob Davis yesterday said the firm is committed to remaining independent. Yahoo also has been the target of acquisition speculation.

"AltaVista is a prime target for going out and raising a couple of billion dollars in this kind of market," John Robb, an Internet analyst with consulting firm Gomez Advisors of Concord, Massachusetts. "I think Compaq just wants to take it public or take a portion of it public. Here's a chance for everyone to get flush."

Many industry watchers thought the computer giant would sell AltaVista. Other options could have included partnerships with established Web sites or internally developed enhancements to the site.

Ashok Kumar, a financial analyst who follows Compaq for brokerage Piper Jaffray, said a spin-off would be premature.

"They need to build critical mass for AltaVista first," Kumar said.

The new AltaVista plans to invest heavily in a television, print, and online marketing campaign to build recognition for its name and Web site, Schrock said.

AltaVista is currently 12th among Web sites in terms of audience reach, according to a recent industry survey. Schrock said he is aiming to propel it to be among the top three most visited sites. AltaVista relied entirely on word-of-mouth advertising in the last year since Compaq announced plans to acquire Digital Equipment and its AltaVista business, Schrock said.

Reuters contributed to this report.

 

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