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eMailbag Monday: Net2Phone, Hoover's and Infospace

Certainly you saw the Net2phone IPO. But did you see what happened to IDT, the parent which owns 57% of Net2phone? Is it typical for spinoffs to be worth more than their parents when the parent retains a majority? The only other example I know of is ZDNET -- there the parent is still worth more than the Internet spin off.
--Louis

Reply: It certainly isn't typical for a spinoff to be worth more than its parent company, but the high valuations of publicly traded Internet companies and the volatility of the Internet stock market make it far more likely.

Look at the respective valuations of Net2Phone and telecom IDT since July 29, when NTOP went public. Net2Phone finished the day at $26.56, or 77% above the offer price, giving it a market cap of $1.26 billion. IDT, meanwhile, fell 10% that day to finish at $18.63, equaling a market cap of $633 million.

Since then both stocks have lost ground, with Net2Phone plunging 38%, giving it a market cap through Friday of $783 million, while IDT fell 16%, leaving it valued at $531 million. So in six trading days, Net2Phone went from having a market cap of roughly double IDT's to one that is only 47% higher. That's volatility.

Earnings Enigma
I follow the ISDEX components pretty closely, trying to gain some knowledge along the way. But often, I just don't understand some market reactions. For example, on 7/27, Infospace (INSP) posted a profit of $409,000, or a penny a share, which topped the consensus Wall Street expectation of a 4 cents per share loss. But for some reason, the market reacted negatively, and INSP dropped approximately 5 points. How is this possible?
--Rich

Reply: It is the work of poltergeists. Seriously, there were a number of companies that failed to get a boost out of impressive earnings in the latest reporting period. In fact, on the same day Infospace.com announced earnings, eBay also beat analysts' expectations and lost $4.81. Yahoo! is another major ISDEX company that couldn't convert good quarterly numbers into share gains.

Often news about or from a specific company is overwhelmed by larger forces that dominate the market. The selloff of Internet stocks that began about the second week of July has rendered irrelevant positive catalysts that normally would drive up prices of individual stocks, and sometimes even stocks across a sector. It's hard to sail into the wind when it's a hurricane. That's why many companies won't release positive news (customer wins, etc.) during a steep market slide: It won't help. They'd rather ride out the storm, wait until the market turns and then use the momentum.

Hoover's In a Crowded Market
Just wondering what you think about Hoover's as a company? Thanks for the feedback. Great site. Keep up the good work.
--Thomas Horn

Reply: Hoover's has a lot going for it, including a strong brand name among people who buy and sell stocks, especially online. It's www.hoovers.com Web site is a must-stop for thousands of investors seeking research, data and information on public companies. It is especially useful for investors researching IPOs.

But the online financial information and services market is hyper-competitive, containing numerous "name" players such as The Wall Street Journal, Dun & Bradstreet, Standard & Poor's, Dow Jones, Bloomberg Business News, CBS MarketWatch.com and internet.com's Internet Stock Report. Portal giants such as AOL and Yahoo! also offer an impressive array of financial news and information.

Hoover's reported revenue of $9.2 million in the fiscal year ended in March, against a net loss of $2.3 million. There are many Internet companies out there with much lower revenue and higher net losses, though Hoover's 79% annual revenue growth rate isn't exactly inspiring. In fact, the Hoover's Q1 2000 earnings report released last week shows $3.2 in revenue, barely above the $3.1 million in the previous quarter. Some of that is seasonal; however, this early in a market, there's tremendous pressure on companies to show continual strong revenue growth.

I suspect Hoover's will have problems doing that. Consequently, I see a larger company eventually buying Hoover's to augment their own financial information offerings.


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