The Old Face Of Convergence

At the beginning of this year, when Internet valuations were still at absurd heights, there were numerous predictions about the pending convergence of emerging 'Net superstars and "old economy" companies, particularly entertainment and media firms.

The argument went that high-flying Internet companies would aggressively leverage their exorbitant market capitalizations to scoop up more traditional firms, thus heralding a glorious and weightless new cyber-day for the global economy.

Those New Year's hangovers had just begun to wear off when America Online offered dramatic proof of this convergence thesis, announcing on Jan. 10 plans to acquire entertainment industry giant Time Warner in a $160 billion deal.

(Ironically, in retrospect, AOL shares fell in the wake of the merger news because investors were concerned the online access provider would no longer be a "pure" Internet company. How many investors would fret over that today?)

In the midst of the buzz generated by the AOL-Time Warner marriage, market observers began speculating about which 'Net powerhouse would be next to swallow an "old media" company. Would it be portal leader Yahoo? How about streaming multimedia software market leader RealNetworks? What would the rest of the new year - the new millennium! - bring?

Well, we know now what it has brought, and it sure hasn't been a convergence revolution led by Internet companies. Rather, it's been a sobering collapse of 'Net ticker prices and market caps.

The results of which have been, not the cancellation of Convergence 2000, but the re-casting of its lead characters, with the "old media" companies acquiring 'Net players to augment and implement their own Web strategies.

The latest example comes Monday with news that magazine publisher Primedia will buy Web directory About.com for $690 million in stock. This is a deal that would not have happened in January, when BOUT had a market cap of $1.3 billion, roughly three times its value of $431 million through Friday's trading.

But at its present discounted price, About.com looks like a steal to Primedia, which is even paying a premium to acquire the Web property. PRM, which publishes magazines such as Seventeen, New York, Modern Bride and Soap Opera Digest, intends to use About.com to channel its content online.

This is just the most recent example of an established media entity snatching up a discounted dot.com. In July, German media behemoth Bertelsmann said it would buy online music e-tailer CDNow for $117 million, or $3 per share.

And just last week, shareholders of U.S. Web portal Lycos approved a merger with access provider Terra Networks, the Internet arm of Spanish telecommunications leader Telefonica.

Even before Internet bubble collapsed, there were only a handful of 'Net players big enough to consider buying a large "old media" company. Thus, the AOL-Time Warner deal, an anomaly in January, is even moreso today.

With Internet stocks continuing to fall, look for more deals similar to Primedia-About.com and Bertelsmann-CDNow. Several U.S. and international Web portals are currently valued in About.com's ballpark, while content sites are among the biggest bargains in the 'Net universe. It will be these kinds of companies that will provide the cheap fuel for the real Internet convergence.


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