NEW YORK (CNNfn) - Yahoo! Inc. Thursday acquired Broadcast.com, the leading Internet audio and video broadcaster, for $5.7 billion in stock in one of the biggest mergers in cyberspace.
Under the deal, Yahoo! is using its richly valued stock to pay an astounding sum for a company that lost $16.4 million on sales of about $22 million last year. But it could prove crucial for Yahoo! in the race to stay ahead of rivals as a leading Internet destination.
"The combined entity looks very strong going forward," Ryan Jacob, a money manager for The Internet Fund, told CNNfn, adding the deal gives Yahoo a "stronger foothold" in the market for online audio and video.
The deal is far from the last merger in the Internet industry, analysts said, and could give a boost to the infant business of sending audio and video over the Internet -- where sound and picture quality still lag behind radio and television.
Yahoo!, one of the biggest gateways, or portals, to the Internet with 30 million unique visitors a month, according to Media Metrix, is one of a handful of cyberspace companies that is already profitable. While Broadcast.com is losing money, it is a leader in online audio and video, which is growing more popular as the Internet "converges" with computers, television and other new and traditional media.
"The newest trend in the portals on the Internet is to
diversify their content into more exciting multimedia, and this is one example of how it's being done," Internet analyst Dawn Simon at Brown Brothers Harriman & Co. told CNNfn.
Dallas-based Broadcast.com airs presidential speeches, lingerie fashion shows and other programs on the Internet.
Investors welcome the deal and Broadcast.com (BCST) stock jumped 10-1/16 to 128-1/4 in late-afternoon trading, while Yahoo! (YHOO) added 7 to 175-3/8 despite concerns that the merger would hurt its earnings in the short run.
The deal follows America Online's $10 billion purchase of Netscape, completed last month, and comes two months after Yahoo! agreed to pay stock now worth $3.7 billion for GeoCities (GCTY), a service that allows 3 million people to run their own Internet home pages. In January, cable Internet service provider @Home Corp. agreed to buy Excite Inc. in a deal then valued at $6.7 billion and now worth about $5.5 billion.
"We've thought all along this year would be a period of tremendous consolidation within the industry" as companies seek mass to better compete, the Internet Fund's Jacob said. He predicted that about half a dozen big Internet destination companies would emerge after the mergers are through.
Yahoo!, which until now had taken a conservative approach toward acquisitions, has now made two significant transactions this year.
Yahoo! officials said the company would probably make more small acquisitions in 1999 in a bid to draw more Internet users and thus more dollars from advertisers on its site.
"We've done two substantial deals this quarter," Yahoo! Chairman Tim Koogle said in a conference call carried on the Internet over Broadcast.com. "You could expect us to do a small number of smaller deals this year." [124K WAV] or [124K AIFF]
Some investors criticized the all-stock merger, which will enrich Broadcast.com co-founder and chairman Mark Cuban.
"When you look at the valuations for Internet companies and the price paid for Broadcast.com, you're really talking about wampum for wampum deals," T. Rowe Price fund manager Chip Morris told CNNfn.
"It's an absolutely ridiculous price paid with currency that's extremely overvalued, in our opinion," said Morris, whose fund owns several high-tech stocks, including Softbank, the Japanese software company that has a piece of Yahoo and stakes in 60 other Internet companies.
Under the deal, Yahoo! will issue 0.7722 of a share, worth about $130 based on Wednesday's prices, for each Broadcast.com share. Broadcast.com has 43.8 million shares outstanding including options.
Yahoo! said it expects to take a charge in the third quarter for expenses from the deal but did not elaborate. The merger will hurt earnings per share for a year and then add to profits in the second half of 2000, officials said in the conference call.
Internet companies such as Yahoo! have seen their stocks soar in recent months, giving them a valuable currency for takeovers.