GoTo.com Inc. just joined the ranks of companies that have experienced the “AOL effect.” If history is any guide, shareholders soon may wish that it hadn’t.
Shares of the Pasadena-based Internet search service, run by Chief Executive Ted Meisel, rose 20 percent Sept. 5 after the signing of an agreement for America Online Inc. to carry its listings. GoTo.com, which charges advertisers to appear at the beginning of its search results, will pay $50 million to the world’s largest provider of Internet access under the multiyear agreement.
The stock’s rise suggested that investors had made a couple of assumptions: first, that GoTo.com would get more than enough revenue from use of its listings to justify the expense, and second, that the shares, in turn, would rise even further. Both might prove to be little more than leaps of faith.
Consider VitaminShoppe.com Inc., a New York-based online retailer of vitamins, minerals and nutritional supplements. The company’s stock tumbled 89 percent from December, when it signed a two-year marketing agreement, through Sept. 6, when an amended contract through mid-October took its place. Its shares rose exactly 20 percent after it disclosed the amendment.
Then take a look at shares that rose at least 10 percent during this year’s first half following agreements with America Online. Like GoTo.com, these stocks benefited from optimism that tapping into the more than 23 million users of the Dulles, Va.-based company’s services would prove rewarding.
Only three of the 19 companies in this “10 percent club” had higher share prices this week than they did after their AOL-inspired rise: Homestore.com Inc., an online real-estate service based in Thousand Oaks; Riverdeep Group Plc, a maker of educational software; and School Specialty Inc., a distributor of classroom supplies.
Voyager.net Inc., the best performer among the others, tumbled 39 percent. The East Lansing, Mich.-based provider of Internet service began distributing a version of America Online’s messaging software in January.
InsWeb Corp.’s 87 percent drop was the largest. The online insurance marketplace, based in Redwood City, signed a contract in February to provide services to users of America Online’s CompuServe, Netscape Netcenter and Digital City services.
Hollywood.com Inc., a provider of movie news, reviews and listings, and GRIC Communications Inc., an Internet software and service provider, both rose for two days after signing contracts with America Online. Afterward, the stocks gave back their gains and kept on falling.
The rise in Hollywood.com took place in April, and drove the stock price more than 20 percent higher. America Online agreed to license its movie listings for use in Digital City, a series of online city guides. Shares of the Boca Raton, Fla.-based company subsequently dropped 43 percent.
GRIC, based in Milpitas, Calif., gained 23 percent in June after agreeing to help the company expand the reach of its AOLGlobalnet Plus network, used for Internet access. The advance later gave way to a 52 percent decline.
It’s possible that GoTo.com may follow their example, rather than the lead of all those stocks that dropped. But the odds aren’t in its favor.
David Wilson is a columnist with Bloomberg News.
