January 30, 2001 1:20 PM PST
Write-offs point to content sector struggles
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It's not news that Web media companies have fallen on hard times. But this month, those failing fortunes are coming into sharper focus as a growing number of companies step forward to assign price tags to the outcome of expansion at the bursting point of the Internet bubble.
Last week, for example, Excite@Home wrote off $4.6 billion in goodwill, or intangible assets, largely to account for a pair of high-priced acquisitions: Excite.com and Web greeting card site Blue Mountain Arts.
Excite@Home is not alone in using a write-off to signal difficulties in running ad-supported Web businesses. AT&T, its majority shareholder, on Monday took a related $1.6 billion charge against earnings.
Also on Monday, Walt Disney made a surprising announcement that it will shut down operations for its Go.com portal and lay off about 400 employees. The company added that it will take a $790 million noncash write-off of Go.com's intangible assets and an additional $25 million to $50 million write-off for severance and fixed assets.
Terra Lycos, created when Terra Networks and Web portal Lycos merged in October, faced a similar valuation issue as Internet stock prices went into free-fall shortly after the deal was announced in May. Spanish ISP Terra had originally guaranteed a $12.5 billion floor for the all-stock deal but later renegotiated the terms, taking some $6 billion off the final price.
The round of write-offs begs the question of whether other companies will have to write off assets as well. The pieces seem to be there: The online advertising market is souring, and Internet investments, once fueled by soaring stock prices, have become expensive busts.
Many companies made large bets on the Internet with cash or stock. But few are likely to feel the pain as keenly as Excite@Home, according to analysts, who said the Excite and @Home deal stands out in a sea of high-priced mergers.
For one thing, @Home issued an additional 50 percent of its total number of outstanding shares to acquire Excite, putting a relatively high percentage of its total valuation at risk. In addition, the company failed to take advantage of a then-common accounting tool, known as "pooling-of-interest," used by many to help reduce the cost of mergers.
Although new restrictions on pooling have since made it less attractive, some of the recent biggest--and arguably overpriced--dot-com mergers used the technique, which does not require companies to write off depreciating assets. Yahoo's $5.04 billion purchase of Broadcast.com and its $2.87 billion acquisition of GeoCities, for example, both used the pooling method.
The making of a merger
Redwood City, Calif.-based Excite@Home, the world's largest high-speed Net access provider, was created when cable modem service @Home Network acquired Web portal Excite for $7.2 billion in 1999.
Company executives, venture capitalists and industry analysts alike touted the combination as a brilliant strategy whereby the company could control the creation of online media content as well as the pipes delivering it into consumers' homes. The combo served as something of a landmark Internet merger and for a short while was the largest dot-com acquisition by value.
From a distance, a $4.6 billion write-off of losses seems eye-popping. In reality, the $4.6 billion is the market value Excite.com has lost since it was acquired by @Home. But companies that divulge sizable write-offs are usually signaling something more troublesome in their businesses.
Deciding to take a write-off charge usually means management admits that particular business or acquired asset is no longer worth its purchase price. It could mean that the business is taking a hit from market factors as well. Excite@Home executives said the company would have written off the declining value of these media properties over time anyway. But, the market situation prompted the company to take the noncash charge in one lump sum.
"It reflects something that is very real: that the Excite property is worth drastically less than what it was at the time that (@Home) bought it," said Glenn T. Powers, an equity analyst at Roth Capital Partners.
In a statement last week, Excite@Home said the charges also came from its purchase of Blue Mountain and the exiting of other businesses such as e-commerce site iMall and online advertising product Enliven. The company's troubles go beyond accounting tweaks, coming after it slashed 8 percent of its staff.
As ad dollars falter
The depreciation of Excite's value underscores how much the Web portal has been injured by its rivals and the souring market for online, ad-supported companies. Before the merger, Excite was largely viewed as the No. 2 Web portal in traffic and revenue behind Yahoo. But last week's earnings report was an indication that being in the second tier is much more difficult than it seems.
Traffic to Excite.com declined 1 percent from the previous quarter. Revenues only increased slightly, from $77.7 million in the September quarter to $79.3 million in the December quarter. Investment bank Robertson Stephens drastically reduced revenue expectations for the whole company to $665.1 million from $1.3 billion. The lion's share of these revenue reductions came from the Excite side of the company.
Some company watchers suggest the moves serve as a tacit avowal by Excite@Home that the content strategy was an expensive risk that yielded less reward than expected.
Clearly, Excite@Home is not alone in its Internet content troubles. Dozens of ad-supporting Net companies have failed or foundered in recent months as advertisers cut back their Internet ad budgets. The softening online ad market has had huge implications for the entire dot-com sector.
Companies that are pulling back on their online ad spending are also becoming picky. Advertisers are putting their dollars in sites that are traffic and brand leaders or with sites that cater to a desired audience. The remaining Web portals that are not AOL Time Warner's America Online, Yahoo or Microsoft's MSN could find it more difficult to show their historically spectacular revenue growth now that the belt is tightening.
"Excite doesn't generate the traffic that a Yahoo or MSN generates," said Matthew Harrington, an equity analyst at Janco Partners. Advertisers "have to ration spending. Some will go to Yahoo but will not go to a general interest portal that's down the food chain."
Going for high speed
Still, Excite@Home has all but turned its back on anything related to narrowband content, so-called rich media, and other projects that relate to the Web portal half of the business. Instead, executives intend to only target the high-speed Internet business, which has grown to boast about 3 million customers. The company's new mantra: broadband and profitability.
"The valuations (in the media businesses) are not coming back anytime soon," Excite@Home Chief Executive George Bell said in a recent interview. "The party's over...You're going to see us reduce our investments. We want to be in fewer businesses and do them well."
Few would fault the company for focusing on its crown jewel, the popular @Home high-speed cable modem service. After all, its 3 million customer total is more than the entire DSL (digital subscriber line) market and rivals many of the world's most popular services. But online content and the Excite half of the company were supposed to be an integral part of the company's plan--so much so that the company paid nearly $800 million for online greeting card site Blue Mountain just 15 months ago.
"The online ad market is not what it was three years ago. Some of our assets today are not what they were three years ago," Bell said in a recent TV interview on CNBC.
Bell, formerly CEO at Excite, described the company's media markets as its "weakest sector."
"The media market has changed," he said. "It's not going to have exponential growth."