Let’s take a walk down memory lane to see how far Internet mergers & acquisitions deals have come. We can learn a great deal from the past because history will repeat itself.

I think the most effective way to explore this subject would be to review some of the top Internet deals during the height of the Internet Gold Rush between 1998 and 2001. Take note of how much has changed and how much has stayed the same since then.

In this  article, we’ll look at the biggest merger of 1999 between At Home Corporation and Excite Inc.

TOP 5 INTERNET DEALS OF 1999

1. At Home Corporation acquired Excite Inc. for $6.7 billion

2. Yahoo! Inc. acquired Broadcast.com for $5.7 billion

3. Healtheon Corporation acquired WebMD Inc. for $5.5 billion

4. Yahoo! Inc. acquired Geocities for $4.6 billion

5. CMGI Inc. acquired AltaVista for $2.3 billion

AT HOME CORPORATION ACQUIRED EXCITE INC. FOR $6.7 BILLION

These two entities merged to create Excite@Home. At Home was a high-speed Internet provider. Excite was a web portal.

The simple rationale behind the deal was Content plus Distribution. At Home would use its high-speed Internet broadband infrastructure to deliver Excite content and service to consumers.

This simple idea was powerful enough to attract cable company investors such as AT&T, Comcast, and Cox Communications as well as the respected venture capital firm Kleiner Perkins, a founding investor in At Home. Cable companies could deliver high-speed cable Internet service through two-way television cable infrastructure to customers.

Small retail investors figured these big sophisticated investors knew what they were doing and followed them into the investment. This caused Excite@Home’s stock price to reach dizzying heights. At its peak at the end of 1999, the stock traded as high as $128.

Excite@Home lost $7.4 billion in 2000. Eventually, the company filed for Chapter 11 bankruptcy protection on September 28, 2001. Its books showed $1.1 billion in debt and $150 million in cash. At the time of the bankruptcy filing, the stock traded at $1.

WHAT REALLY WENT WRONG?

Today, in hindsight, it’s easy for us to say that the managers and investors in this deal were dumb. However, we must remember that content & distribution mergers still happen today. The problem with this deal was not necessarily the idea. The problem was with the execution of the idea.

Excite’s Content

Excite’s content was actually very poor. As they say in the media and entertainment businesses, content is king. You can have the best marketing team in the world but if your content is not useful or entertaining to consumers, your business is doomed. No eyeballs equal no revenues.

At Home’s Distribution

On the other side of the table, At Home had the exclusive right to provide broadband services through the fat cable pipes of its big cable company investors. This exclusive right granted At Home monopolistic access to millions of cable TV customers. This was extremely appealing to investors.

But At Home hadn’t actually built the broadband technology infrastructure it was expected to use to distribute Excite’s content to the masses.

The Future was Broadband

It’s important to remember that back in the late 1990s, broadband Internet service was touted by every mass media outlet as the future of communication. Broadband would enable the average person to surf the Internet faster, work faster, and communicate faster. This was expected to boost productivity in the economy.

The cable companies would promote Excite@Home to their millions of customers and split revenues with Excite@Home. Excite@Home was expected to be the biggest player in this huge important space. Investors were understandably excited.

But everyone, including Excite@Home’s management team, underestimated how much it would cost to build the broadband infrastructure. A conservative estimate was it would cost tens of billions of dollars, which the company didn’t have.

The market turns against Excite@Home

With mounting losses, investors weren’t about to stick around and wait patiently for Excite’s content to be improved and the broadband infrastructure to be built.

By 2001, the Internet bubble was bursting: advertisers weren’t advertising on portals and Internet businesses made little to no money.

It didn’t help that America Online (AOL) went to the courts to challenge the monopolistic structure of Excite@Home’s deal with the cable companies. AOL wanted to offer its competing portal and broadband services to cable customers. (This need for distribution was one of the reasons why AOL later merged with Time Warner, which owned a cable network.)

Cable companies turn against Excite@Home

In a death blow, after AT&T acquired a controlling stake in Excite@Home, the agreement with cable companies was modified. It gave the cable companies the right to discontinue exclusively marketing Excite@Home’s service to their customers. They could give a 6-month notice and offer their own broadband services directly to their customers.

Essentially, Excite@Home no longer had the full backing of its biggest investors and most important partners – the cable companies. The monopoly was over before it even started.

The cable companies figured they didn’t need Excite@Home to offer broadband services. After all, Excite@Home was struggling and didn’t seem to know what it was doing. So the cable companies reasoned that they could do it better themselves. Or at least find other partners who could provide a better broadband service to their cable TV customers.

It was the beginning of the end of Excite@Home.

Suddenly, the investment looked very risky. Retail and institutional investors wanted out of Excite@Home. They dumped their stock. The business couldn’t raise any more money to stay solvent, and it collapsed.

OTHER POTENTIAL ACQUIRERS

In 1998, Yahoo! Inc. was interested in acquiring Excite Inc. for up to $6 billion. Yahoo! already owned and operated a search engine and web portal.

The rationale behind this deal would have been that Yahoo! would add the portal to its portfolio or integrate it into its existing portals.

The question that never got answered was the price. $6 billion seemed like a high price for a portal with poor content. However, it was a popular web destination and Yahoo! did have the expertise to fix the content problem. We’ll never know for sure what could have happened.

ACQUISITION FINANCING

Remember that Internet stock prices were going through the roof in 1999. As such, many of these deals were financed with stock. The acquirer offered stock to the target business owners or raised acquisition capital using the high-value stock as collateral.

With its high stock price, Excite@Home went on a shopping spree: It acquired iMall for $425 million in stock. It also bought Blue Mountain Arts for $780 million in cash and stock. This online greeting card company owned BlueMountain.com, a popular web destination which produced no revenues.

Within 2 years of the $780-million acquisition, Blue Mountain Arts was sold by Excite@Home for $35 million to American Greetings.

VALUATIONS

Most of these Internet companies had little revenues and no profits. So the question we all ask ourselves today is how did the acquirers and their advisors come up with these high valuations?

It’s easy to call these businesses overvalued today. But there are always logical metrics used to reach these acquisition values that were deemed reasonable at that time.

Website Financials

Due to the fact that many of these Internet businesses were very young, they didn’t have 5 years of operating history. As such, they often had to be valued based on trailing twelve month (TTM) revenues. Valuations were often as high as 12 times TTM revenues.

So if an Internet business made $100 million in TTM revenues but earned no profit, it found itself worth up to $1.2 billion at that time.

Monopoly distribution deal

In a unique situation such as the Excite@Home deal in which a company is given a monopoly in a space that is deemed revolutionary, valuations will be high. At its peak, the business had a market cap of $35 billion.

The monopolistic exclusive rights contract with cable companies was factored into the original valuation price of the merger.

Website Traffic

For Internet businesses that produced little to no revenues, and of course, had no hard assets, technology mergers & acquisitions advisors had to get creative and use other metrics to value these businesses.

They sometimes used unique monthly visitors.

I can hear you saying: Why on earth would any intelligent mergers and acquisitions professional do that?

Their thought process was simple: It was (and today, still is) difficult to attract visitors to a website. And it was even more challenging to monetize this traffic back in 1999.

The Internet was new, and unlike today, consumers weren’t exactly comfortable shopping online and inputting their credit card information in an online shopping cart.

Corporations that had always spent the bulk of their advertising budgets in traditional media were apprehensive about advertising on this new world wide web.

In a nutshell, websites made little money.

Therefore, M&A advisors and business valuation firms assigned value to web-based businesses that could generate traffic to their websites. They figured that the acquirer could figure out how to monetize this traffic in the future.

Some web-based businesses were valued at up to 100 times unique monthly visitors.

Of course, today in 2014, visitor multiples like this would be balked at. Website traffic is only valuable today if it is monetized.

SOFTWARE INSTALL BASE

But let’s not forget that deals like Facebook’s $19 billion acquisition of Whatsapp in 2014 valued its install base of over 500 million users more than its revenues. So technology transaction values are still not overwhelmingly weighted toward the actual financials of the target business. Other metrics are also used to value these businesses today.

AFTERMATH

Excite.com portal still exists today. It is operated by Yonkers, New York-based Mindspark Interactive Network Inc., which is owned by IAC Corporation.

At Home Corporation is defunct.