When news first broke that Disney would be acquiring the rest of Internet portal Infoseek (of which Disney currently owns 42.5 percent), merging it with the rest of Disney’s other Internet assets, and issuing a tracking stock for the new business, shares of Infoseek spiked higher. But within hours, the market reversed direction, and by midday Monday Infoseek’s shares were down almost 10 percent. That’s the result of three concerns: the complexity of the deal; uncertainty over who’s going to run the new company; and the abiding concern that when online businesses get bought by offline companies, their assets are undervalued.
The first two concerns are valid. Essentially, Disney is buying the rest of Infoseek with shares in the new company, which will be called Go.com (after Disney’s own portal, the Go Network). In deciding how many shares of the new business to give Infoseek shareholders, Disney is valuing its own assets (currently called the Buena Vista Internet Group) as worth slightly more than Infoseek’s. But how that calculation was reached is not clear from what Disney has said so far. And since the new company will also be getting about 40 percent of its revenue from e-commerce sales of Disney merchandise, it’s hard to know what its business will be worth or how the market will value it. In other words, if you’re an Infoseek shareholder, it’s hard to know whether you’re being snookered or well-paid.
That’s especially true because Infoseek shareholders won’t actually be getting an ownership stake in anything. The Go.com stock is a tracking stock, which means that instead of the stock’s being tied to the underlying financial performance of the company, the stock is just a piece of paper that gives investors no claims at all on Go.com’s future profits. The tracking stock is supposed to be a way of unlocking shareholder value by putting potentially overlooked assets into the spotlight. But it presupposes that investors are too dumb to realize the value of those assets when they’re within a larger company (a dubious assumption), and it reduces investing to pure speculation. It’s been apparent for a while that Disney was going to do something like this, but it’s a gimmick that in the long run the company would have been better off without.
From a business perspective, this deal may make sense, but since Infoseek’s CEO is resigning and there is no obvious choice within Disney to run the new company, it’s hard to know what the new firm will be, since we don’t know who’s going to manage it. So even if you put aside doubts about the tracking-stock aspect of the deal and the complexity of the valuations, from a straight operating point of view there’s no good reason to jump on board. In the long run, I suspect, Disney will be able to leverage its brand name and its already existing Internet strength into a real business. But things are pretty vague right now.
The one concern that isn’t valid is the continual worry of investors that Net assets are undervalued by “real” companies. This deal is so complicated that Infoseek shareholders may be getting lowballed. But we shouldn’t assume that because Disney is involved, Infoseek shareholders must be getting lowballed. Ever since Barry Diller tried to buy Lycos and was blocked because his offer allegedly undervalued the portal site, the allure of Big Media’s buying out Internet companies has disappeared. But Diller’s offer made sense from a business perspective, offered fair market value (that is, he bought Lycos for what the market was valuing it), and would have created value in the long run. The nature of the Net bubble is such that any offer, except those that other Internet companies make, will disappoint someone. But let’s be serious. In the long run, a company will be valued for the free cash flow that it produces, not for the .com at the end of its name. In evaluating deals, shareholders would be better off rejecting their delusions that Net frenzy will continue forever and considering instead whether an offer makes economic sense.