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WEBDEX spotlight: Microsoft Goes Hyper For LinkExchange

With Microsoft agreeing to acquire LinkExchange for $250 million stock, I put the deal at 15x revenue, about mid-way between my estimated run rate revenue multiples for publicly-traded DoubleClick (NASDAQ:DCLK) at 6x and 24/7 Media (NASDAQ:TFSM) at 25x.

LinkExchange represents the #2 here, of this group in reach and estimated revenue, late to the IPO party that the two rivals have cashed in on.

Internet.com's

Unique

Oct 28

Nov 4

Oct 28

Nov 4

Percent

WEBDEX

Users

Market cap or PMV*

Market cap or PMV*

User

User

change

(millions)

(millions)

(millions)

Value

Value

Lycos

17.6

$1,425

$1,929

$81

$109

35.4%

MSN.com/Hotmail*

15.6

$1,750

$2,100

$112

$135

20.0%

Yahoo

26.1

$11,874

$14,181

$454

$543

19.4%

Netscape.com*

16.3

$1,750

$2,000

$107

$123

14.3%

GeoCities

15.5

$935

$1,035

$60

$67

10.7%

AOL.com*

21.8

$3,200

$3,500

$147

$161

9.4%

Disney.com*

10.4

$1,250

$1,350

$120

$129

8.0%

Microsoft.com*

19.6

$2,200

$2,300

$112

$117

4.5%

Excite

16.6

$1,950

$1,997

$118

$121

2.4%

Infoseek

11.0

$995

$959

$90

$87

-3.6%

TOTAL

170.5

$27,329

$31,351

$1,402

$1,591

13.5%

AVERAGE

17.1

$2,733

$3,135

$140

$159

13.5%

) 1998 Internet.com *PMV=estimated private market value for Website only; Users: Media Metrix

Also, I think it's more of a technology play than reach since most of LinkExchange's revenue probably comes from its deals with Yahoo, Excite, Netscape, GeoCities, Disney--all of which are competitors to Microsoft and which I think will drop LinkExchange as soon as this deal goes through.

The real play then for Microsoft may be the 200,000 or so small Web sites, the mom and pops, that the software seller may want to open the channels to sell the IE, NT, MSN platform to with all the services such as Expedia, Money, HomeAdvisor, CarPoint. Microsoft wanted the technology and Web site reach of tomorrow.

Why didn't LinkExchange go public?

Two reasons: DoubleClick hasn't had the kind of respect in valuations the search guys have and 24/7 stole some ad-network gee wow factor. And 2) LinkExchange would have been third in that group, flying all over the planet road showing a story that's been told by DCLK and TFSM and not as likely to garner institutional interest.

Also, the founders of LinkExchange, its venture capital investors including Sequoia Capital (which provided seed funding for it in 1996), and the other two firms LinkExchange acquired, Submit-It! and Merchant Planner, may also simply wanted to get liquidity.

For its part, we think Microsoft, which has acquired dozens of Internet firms of all flavors, wanted to add more depth to its yet again reborn, revised, revisited, revamped Web effort MSN, as more service-oriented rather than content oriented.

Given the IPO market's stop and go infatuation of late, we think more private deals like this could get done for many IPO candidates. This is reportedly an all-stock deal but that favors LinkExchange also since Microsoft (NASDAQ:MSFT) shares are better than cash, as its band of 1,000 millionaires that Microsoft has made over the past 20 years will admit.

On the valuation side we give MSN a boost in private market value based on LinkExchange and want to see how the unduplicated reach looks.

The deal comes at a time when WEBDEX is up an phenomenal 13.5% in one week. Lycos (NASDAQ:LCOS) led the way with the Street taking heed of its buy community, be community, let's have a love-in now that we're a community spree.

MSN/HotMail comes next as we bump the value of the Web site/service up 20% to $2.1 billion based not only on LinkExchange but HotMail's sizzling continued growth. We recall talking with HotMail co-founder Sabeer Bhatia in early 1997 when HotMail was still private and the growth from then to now just continues. Its key now is to stop the spammers from ruining its brand so that it doesn't get known as a "spammer's e-mail service."

AOL (NYSE:AOL) and Netscape (NASDAQ:NSCP) huddle closer with AOL's Digital Cities going up on Netscape's Netcenter.

We place a value on Netscape.com at $2 billion, in line with the search engine crowd. NSCP market cap sits at $2.4 billion. In our mind that's like paying for the Web site but getting the software side for next to nil. It may take a deal to bring this value out we suspect. Which firms lack a major Web site presence?

IBM, Sun, Apple, NYTimes Co., Times Mirror, News Corp., CBS, etc. We could go on for days. The mix is worth noting and evidence of the multifaceted appeal of the Web, part media, part technology, part service, part communications/information.