The long-awaited shopping spree just started.
Disney (DIS) said it will buy a 43 percent stake in the search-engine company Infoseek (SEEK), in a US$770 million transaction that could bring more Internet visitors to its news, sports, and entertainment sites.
At a stroke, the deal brings together one of the top Net search services -- Infoseek claims 14 million unique monthly visitors -- with the company that owns some of the most powerful broadcast media brands: ABC, ABC News, and ESPN, not to mention the Disney name itself. The goal is to create a compelling starting point, or "portal," for Internet explorers within a year, the companies said.
The move by Disney comes after weeks of speculation that the company might buy one of the established Internet portals, like Infoseek or rival Excite (XCIT). Excite, the Number Two search engine, looked like the most likely target three weeks ago.
"It came down to a matter of value," said International Data Corp. research analyst Paul Johnson. "An investment in Excite would have cost Disney an arm and a leg. Infoseek costs only an arm."
In a complex swap of stock and services, Disney will acquire 25.8 million shares of Infoseek stock, or a 43 percent stake. Disney will pay $70 million in cash for 2.6 million of those shares, and trade Starwave -- a producer of top-rated news, entertainment, and sports sites -- for the balance. It also will acquire warrants that allow it to buy a controlling interest in Infoseek over the next three years.
Disney owns almost all of Starwave, with a small percentage belonging to individual investors. Infoseek also will issue another 3.1 million shares of stock to the independent Starwave shareholders. Additionally, Infoseek agreed to spend $165 million on promotional efforts with Disney.
Executives of the three firms said that a brand new portal will be launched later this year and will be backed by a $50 million marketing blitz in 1999. The companies would not say what the new site would look like or what it would be called, though Disney's January registration of the domain name "go.com" suggests a possible moniker.
Jake Winebaum, chairman of Disney's Buena Vista Internet Group, said in a conference call that the deal "provides Infoseek with the rocket fuel to take it to the next level" in competition with powerful foes Yahoo and Excite.
Infoseek chief Harry Motro said that for his company, the logic of the deal came down to the power of the brands it is combining. "There is only one Disney. There is only one ABC. There is only one ESPN," he said. "You simply won't find this combination of strengths in any other Web company."
Some investors were not pleased with terms of the transaction. In exchange for just $70 million in cash and the divestiture of so-far unprofitable Starwave, Disney acquired some $770 million worth of Infoseek stock, based on Thursday closing stock prices.
Disney's hand over of Starwave represented a hefty premium over the $250 million Disney reportedly spent to buy the company in April.
Infoseek shares initially surged on the news, but settled back as investors re-evaluated the deal. In early Nasdaq trading, its shares jumped as much as $7.50 to $42, but it closed at $35.12, just 62 cents above the previous day's close.
Infoseek executives said they got a good deal.
"In the end, no matter how the deal shakes out, no matter what the value is, there's one simple fact -- there's only one Disney," said Todd Friedman, Infoseek's investor relations spokesman. "You have to look at your prospects 10 years in the future. Disney guarantees that future."
Analysts said Disney’s purchase makes sense. Traditional media companies are interested in getting a big chunk of the $1 billion of advertising being spent on the Internet each year.
"They're setting themselves up to be the TV network of tomorrow," said Vernon Keenan, an analyst with Zona Research.
The Disney transaction came a day after reports that AT&T (T) attempted to buy America Online (AOL) for more than $19 billion. There is growing speculation that more portal acquisitions are in the offing.
"We're in the middle of a feeding frenzy here," said Keenan.
The recent spate of deals may also put pressure on the portals that have pledged to remain independent. Infoseek, with the backing of Disney, is vastly more threatening to leaders Yahoo (YHOO) and Excite, analysts said.
"These portals need media partners," said Chris Charron, analyst at market researcher Forrester Research. "The scale of resources required to compete in the portal space is jumping up by orders of magnitude. These guys are going to need help."