Getting Excited About [email protected]

On paper, mergers always make sense. There are usually synergies, cost
efficiencies, and increased marketshare.

One merger that looked particularly bright was that between @Home and
Excite, which was struck in May. However, since then, the new entity —
[email protected] (ATHM)
— has fallen from a high of $99 to $42-13/16.

Then again, the Net stocks have been rocky since then, which helps explain
some of the fall. But there are other reasons. First of all, the
[email protected] deal was very complex and likely diverted management’s
attention away from the core business.

The second cause may be AT&T, which owns 26 percent of [email protected] and has 58 percent of
the voting power (this was the result of AT&T’s purchase of
Tele-Communications Inc).

In other words, AT&T is running the show. In fact, AT&T will soon be the
largest owner of broadband cable pipe — once its deal for MediaOne is

Interestingly enough, last week a shareholder suit was filed against AT&T,
alleging that the telephone giant is not allowing [email protected] to execute on
its business plan.

Despite all this, the fact is that the company is starting to show results.
Yesterday, [email protected] reported its quarterly results: revenues surged
from $58 million to $113 million and registered users increased by 16 percent to
44 million. In fact, with the recent purchase of MatchLogic, [email protected]
will be able to “data mine” this growing registered user base.

But the real value of [email protected] is not Excite, but @Home, which is the
broadband component of the company. Basically, @Home has exclusive
agreements with Comcast, Cox Communications, Shaw Communications and Rogers
Communications until the year 2002.

There are many companies who desperately want access to these broadband
pipes and will pay a premium for it.

But, of course, a deal will need the blessing of Ma Bell. And it looks
like this will happen.

Reasons include:

  • [email protected] has already
    undergone a reorganization, dividing the company into a media division and
    subscriber access division

  • a recent FCC ruling indicates that the
    proposed merger of Media One would not be blocked

  • the resignation
    of the Net chief at AT&T, Leo Hindery, who was dead-set against the
    marriage of broadband and content.

In the past few months, [email protected] has been the subject of a myriad of
buyout rumors, with Yahoo!, AOL and even Microsoft among the predators.

While it usually a bad idea to buy a stock based on a potential merger,
[email protected] is an exception. The next phase of the Net is broadband. Not
only does this company have exclusive cable agreements, but is also rapidly
building its subscriber base, which increased by 35 percent to 840,000 in
the last quarter.

In fact, it seems reasonable that, in a few years, the
company could have 10 million subscribers — thus making [email protected] an
irresistible target for buyout.

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