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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