Deal Spins A Complicated Web For Starwave -- Disney, Infoseek See Portal Potential
Why are California-based Infoseek and the Walt Disney Co. betting nearly $900 million on Starwave, the Bellevue-based Internet company that is years from turning a profit?
Much of the answer lies in the eyes of Starwave's beholders - its millions of beholders.
Starwave financial documents filed with the Securities and Exchange Commission last week offer a glimpse of how Internet intangibles, such as cyberspace's galaxy of potential users, can plump up the most dismal of bottom lines as companies position themselves for a surge in Internet commerce.
The value in Starwave, which produces news, sports and entertainment information Web sites, lies not in its past performance but in its potential - "what it hopefully will permit Disney to accomplish," said David Leibowitz, managing director for Burnham Securities in New York.
Infoseek and Starwave shareholders will vote in November on an agreement reached earlier this year between executives of the two companies. The deal calls for Disney, Starwave's current owner, to give Infoseek $70 million in cash, a $139 million promissory note payable over five years and its ownership in Starwave.
In exchange, Disney will receive 43 percent of Infoseek's available stock with the option of eventually gaining a majority stake in Infoseek, one of the top Internet search engines.
"The reason we're interested in pairing up with Starwave is not because we desire to re-create the past," said Les Wright, chief operating officer of Infoseek. "Infoseek, which was No. 4 or 3 in the portal space (launch pads for Internet cruising), now has the real opportunity to be No. 1."
Starwave was begun in December 1991 by Microsoft co-founder Paul Allen. After several years of ramping up, the company started producing online informational sites in 1995. Despite reaching millions of viewers a week through its sports and news sites for ESPN and ABC News, the company ate up some $96 million in loans made to it by Allen and generated relatively low advertising and subscriptions.
It has lost about $110 million in the past seven years and has no way of accurately predicting future sales. Allen sold his stake in the company in 1997 and 1998 to Disney, which owns ESPN and ABC, for $300 million in cash and stock, said Jake Winebaum, chairman of Buena Vista Internet Group, the Disney division that oversees its online sector.
As with many Internet companies, the audience a site can command is extremely valuable. That audience becomes even more critical as several companies, including Starwave, Disney and Infoseek, develop their "portals" - or bases for users to travel to sites on the Internet. The more people who use the site, the more attractive it is to advertisers.
In that light, the transaction is a great buy, Winebaum said.
Just how valuable are all those eyes? Consider Merrill Lynch's analysis, submitted in the SEC filing. The analysts in part looked at similar public companies, including their market valuations, the number of people visiting their sites, and the number of pages those visitors clicked onto within the overall site.
Under that model, each time a different person visited ESPN's Web site, it essentially was worth between $194 and $214.40 in potential advertising value, according to the analysis by Merrill Lynch. The average value from steering the users onto other pages included in the overall site was between $107 and $118.30.
It's less for ABC News' Web site - there, each unique visit to the site is worth somewhere between $57.50 to $76.70.
The value of the number of pages a user would see ranged from $82.20 to $109.50.
The people who work at Starwave are a valuable asset as well - 333 employees in technology, Web operations, general administration and joint ventures. It would cost about $15.3 million to replace them and train new hires - roughly $46,300 a person.
Although the filings say Starwave Chief Executive Michael Slade and Chief Operating Officer Curt Blake are expected to leave the company once the mergers go through, it's not necessarily a done deal, said Winebaum.
And there will be no significant layoffs under the merger, he said.