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TheStreet.com: Buyout Premiums

This year, there has been a rash of merger activity in the Net sector. In fact, this year looks like the start of a major consolidation wave. What motivates a company to buy another is often an art, not a science. A company may want to buy another so as to destroy a competitor. Or, the acquisition may ad valuable assets, a customer base or intellectual property. Sometimes, an acquisition makes sense because the price is dirt cheap.

Yesterday, buyout rumors hit theStreet.com (TSCM) , which is a comprehensive financial site. I've been a loyal subscriber and enjoy the content tremendously. Unfortunately, the financial content space is grueling. First of all, the competition is stiff. After all, you can get lots of information for free. This, of course, makes it difficult to have a subscription-based model. This definitely factored in the decision for theStreet.com to recently make most of its site free.

However, the other problem is that online advertising is not an easy business either. Click-through ratios are usually low, so sponsors tend to be cautious with online ad spending.

Faced with this environment, theStreet.com has apparently hired the investment bank of Wasserstein Perella. The reason was that theStreet.com is looking at "strategic alternatives." Well, this is the code word for selling out.

As a result, the price of theStreet.com increased about 5 percent on the news. But, while buyouts usually mean nice returns for shareholders, this is not always the case. So, be wary.

Basically, to get a strong premium, a buyout candidate needs strong buyers. For the theStreet.com, there are a variety of possible suitors. But, there are problems. Other public financial sites are either too small or have stock prices that have come under pressure -- like CBS MarketWatch.

Now, a portal may want to buy the company. One idea is for AltaVista to be a purchaser. The company recently purchased the popular chat site Ragingbull.com. There is also Go2Net, which owns the Silicon Investor site and has been an active acquirer. Finally, Lycos purchased Quote.com.

Another set of buyers would be traditional media companies, such as Dow Jones or Reuters Group. But these companies do not have the high-flying Net valuations. Moreover, they do not like to deal with heavy losses. In the past quarter, theStreet.com lost $12.1 million.

Yes, it was smart for theStreet.com to transition away from the subscription model. The grim fact is that, for the most part, consumers do not want to pay for financial advice (not a fun concept, especially for people like me that write the stuff). But this means theStreet.com will have to play catch-up, as it focuses on boosting its page views and advertising revenues. This is likely to put a damper of the valuation of the company. In other words, assuming there is a buyout, the premium may be a small one.



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