OLD ECONOMY STALWARTS mARRY bEATEN-DOWN SURVIVORS OF TECH WRECK

First came the dot-com craze, with predictions that Old Economy companies were obsolete. Then came the dot-com crash, with dealmakers rushing to snap up and combine assets from the carcasses of failed online ventures. And now comes the next wave, with Old Economy stalwarts marrying New Economy survivors of the tech wreck. Evidence of the next wave is beginning to pop up everywhere, and it's expected to grow in the weeks and months ahead. Old Economy stalwart Ticketmaster Corp., under a deal announced last week, is linking back up with Pasadena-based Internet counterpart Ticketmaster Online City-Search Inc., with Barry Diller's USA Networks Inc. regaining ownership control of the whole shebang. Also last week, news surfaced that Gemstar-TV Guide International Inc., another Pasadena-based New Economy darling, has been talking with Barnes & Noble Inc. about combining their businesses. (Gemstar is said to be interested in accessing Barnes & Noble's brick-and-mortar bookstore chain the nation's largest to market its fledgling electronic book business.) "More and more, we're seeing brick-and-mortar companies looking for Internet companies to merge with," said Larry Braun, managing director at investment bank Barrington Associates. "In the future, I don't think you're going to see 'Internet' companies, you're going to see ticket companies and travel companies or whatever companies using the Internet." There is, however, a significant impediment for such mergers if they involve publicly held companies: market reaction. So far, whether it's been the pending America Online Inc./Time Warner Inc. tie-up or the Ticketmaster reunion, Wall Street hasn't jumped up and down with enthusiasm over these marriages. The day the Ticketmaster deal was announced, Ticketmaster Online's stock fell 94 cents to $11.63 a share, and the next day it lost $1.25 in pre-Thanksgiving trading to close at $10.38. "It's tough because on one hand you see how you can leverage your company's business offline and online into one platform, but the market reaction hasn't been favorable," said Michael Cibula, a tech analyst at Robertson Stephens in San Francisco. Nonetheless, the severe downturns in the once-sky-high market valuations of Internet companies have made it much more affordable for brick-and-mortar companies to pick up complementary Internet businesses or vice-versa.

Deal catalyst

Indeed, the Ticketmaster deal probably wouldn't have gotten done without the sharp adjustment in share prices for online businesses that has taken place since the spring. "This deal would have been much harder to do if TMCS was valued at $3 billion, as it once was," said Ticketmaster Online-CitySearch president and chief executive John Pleasants. "At (a market value of) between $1.3 billion and $1.6 billion, it made it easier to get more equal value for the two companies." That is, of course, a reflection of how Web strategies have changed over the last couple years. USA Networks spun Ticketmaster's online activities off in late 1998 and merged it with CitySearch Inc. in exchange for stock that gave it just under 50 percent of the new company. The subsequent initial public offering was greeted by the markets with the kind of enthusiasm now largely absent from Internet ventures, and the share price went up above $50. That allowed Ticketmaster Online-City Search to expand quickly and give a nice return to its investors. But its success has also come, to some extent, at the expense of Ticketmaster, given that more and more people are buying tickets over the Internet. Yet, the online ticket vendor has continued to lose money, while predicting profitability by 2001, and once the company's stock price fell, combining the two operations made perfect sense. Under terms of the deal, Ticketmaster Online will pay a little more than $600 million in stock for Ticketmaster, although it is the latter name that will be retained for the new merged business. "While it was good for TMCS not to be fettered by traditional thinking, it reaches a point where you wonder, 'Are the benefits of being separate outweighed by the synergies?'" said Pleasants, who will be CEO of the merged company.

Market forces at work Market forces at work

While the circumstances surrounding Ticketmaster are unique, the market forces driving the deal aren't, and that means similar mergers are looming on the horizon, local venture capitalists and investment bankers said. "There's a lot of bargain hunting to be done," said Massoud Entekhabi, who recently jumped from heading up the L.A. global technology practice of PricewaterhouseCoopers to become a managing director of TL Ventures. "For many, the only choice is a partnership or a buyout." While reluctant to specify which companies might be seeking such deals, Entekhabi and others did point out a few areas where such activity is likely to be concentrated. Not surprisingly, anything tabbed as providing Internet retail services seems the most likely to be ripe for mergers. This includes everything from booking a vacation to buying a house to recruiting temporary staff. The reasoning behind this is that, even as customers grow more familiar with using the Internet, they continue to prefer physical contact for some things. Getting information on a new house using the Web may be preferable, but few buyers would ink a deal without physically walking through the house and checking out the neighborhood. Indeed, real estate is one area where marriages between complementary Old Economy and New Economy forces will likely occur. For example, Thousand Oaks-based Homestore .com has become the country's largest real estate portal largely due to its ties to established industry backers like the National Association of Realtors. Investment banker Braun said he is currently involved in talks with a local Internet real estate company that is contemplating some kind of merger with an offline counterpart.

Need to touch

"I think, ultimately, when you lease space, you want to touch it," Braun said. "Leasing agents are invaluable. You can narrow your choices by utilizing online resources, but you're not going to see sales of real estate or leasing just online. We're seeing the merger of these businesses." The same logic applies to buying an automobile, since it's hard to kick the tires when logged on. Culver City-based CarsDirect.com has a well-trafficked site, but earlier this month dramatically cut its staff, just as many of its competitors have. Given its recognized brand name, CarsDirect might make an attractive acquisition target for an established dealership wanting a quick, established online presence. "Automobiles is an online business where an offline presence is necessary," Robertson Stephen's Cibula said. "I know very few people who are willing to pay $40,000 for a car without driving it. This is another category where you want to see what you get, in person." Interestingly enough, that same logic might not apply to other e-retailers, namely toy sellers. While much has been made of the rapid rise and fall in the stock price of Santa Monica-based eToys Inc., it might not be necessary for that company to link up with a brick-and-mortar toy store chain. EToys did receive complaints from customers last holiday season, who claimed that returning items was difficult. But brick-and-mortar giant Toys R Us Inc. also has suffered a big number of complaints, even after linking up with Amazon.com Inc. (Many of those complaints were related to the company's policy that prohibits customers from returning its toys bought online to its stores.) In addition, most consumers do not feel the same need to physically encounter a toy, as they do with a car or house. If eToys' has succeeded in getting the bugs out of its delivery system this holiday season, there's reason to believe it could survive by itself. "With eToys, in their segment, they can go it alone," Braun said. "It could make a lot of sense to tie-up with a (brick-and-mortar) company, but they don't have to." To complete a merger of any kind requires a lot of due diligence, and that is especially true in the present environment. The continuing fluctuations in Internet companies' valuations make doing a deal a delicate matter. As Braun puts it, "nobody wants to look stupid." That's why the public market's negative reaction to the recent Old Economy/New Economy marriages may slow but not halt the merging of online and offline worlds. An Internet company with fast-growing revenue is often going to find itself somewhat slowed by its landed partner. And a profitable Old Economy company is going to see its margins cut by an e-business still in the red. "With valuations cut by one-tenth in many Internet companies, the pickings could be good," Cibula said.

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