Case study:7.2 The Hunt for Elusive Synergy—@Home Acquires Excite

By: Nino Bazhunaishvili

1 INTRODUCTION

MISSION

VALUATION

RECOMMENDATION

Content

2

3

4

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History

• @Home Network  was a high-speed cable Internet service provider .

• It was founded by Milo Medin, cable companies TCI, Comcast, and Cox Communications, and William Randolph Hearst III, who was their first CEO, as a joint venture to produce high-speed cable Internet service through two-way television cable infrastructure.

• At the company's peak it provided high speed Internet service for 4.1 million subscribers in the U.S., Canada, Japan, Australia, and the Benelux nations, operating four joint ventures, three of which were international.

 http://home.excite.com

@HOME network

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History

•  Is a collection of web sites and services, launched in December 1995. Excite is an online service offering a variety of content, including an Internet portal showing news and weather etc. (outside USA only), a search engine, a web-based email, instant messaging, stock quotes, and a customizable user homepage.

• Portals offer :search services, chat, shopping, news and entertainment in an effort to become primary destinations for users, who in turn buy products and view ads.

• Excite's had 20 million registered users

Excite Portal

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Regulation

The Passing of the Telecommunications Act of 1996 enabled cable companies to start to offer Internet telephony services to customers.

 One of the most controversial titles was Title 3 ("Cable Services"), which allowed for media cross-ownership.

The goal of the law was to "let anyone enter any communications business—to let any communications business compete in any market against any other". The legislation's primary goal was deregulation of the converging broadcasting and telecommunications markets.

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MissionThe deal have a major impact on the adoption of

broadband and lower the cost of the adoption rate of broadband technology.

The combined companies are hoping to accelerate broadband adoption by exposing the millions of Excite "narrowband" users to the benefits of a broadband platform.

The merged company will be immediately accretive to earnings, and 15 to 20 percent accretive by 2001-2002. He also forecast that the merged company would generate $2 billion in revenue by 2002.

On the expense side, we'll continue to invest heavily in R&D to exploit our back-end technologies and the

broadband distribution we have in order to stay the leader," Jermoluk said.

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Assumptions

Annual customer service costs equal $50 per customer Annual customer revenue in the form of @Home access charges and

ancillary services equals $500 per customer None of the current Excite user households are current @Home customers. New @Home customers acquired through Excite remain @Home

customers in perpetuity @Home converts immediately 2 percent or 340,000 of the current 17 million

Excite user households. @Home’s cost of capital is 20 percent during the growth period and drops

to 10 percent during the slower, sustainable growth period; its combined federal and state tax rate is 40 percent.

Capital spending equals depreciation; current assets equal current liabilities FCFF from synergy increases by 15 percent annually for the next 10 years

and 5 percent thereafter. Its cost of capital after the high-growth period drops to 10 percent.

The maximum purchase price @Home should pay for Excite equals Excite’s current market price plus the synergy that results from the merger of the two businesses.

MV of Excite $ 3.5 billion

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Valuation

year FCFF PV of synergy

1 91800000 $76,500,000.00 2 105570000 $73,312,500.00 3 121405500 $70,257,812.50 4 139616325 $67,330,403.65 5 160558773.8 $64,524,970.16 6 184642589.8 $61,836,429.74 7 212338978.3 $59,259,911.83 8 244189825 $56,790,748.84 9 280818298.8 $54,424,467.64

10 322941043.6 $52,156,781.49

Total PV   $636,394,025.84

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Valuation

Terminal Value  

$6,781,761,915.56

PV of TV  $1,095,292,411.

19

P(0)  $1,731,686,437.

03

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Valuation

Maximum purchase price of Excite (including PV of synergy) $5,231,686,437.03

VS $6,7 Billion

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Limitations of valuation methodology employed in this case

• The valuation is heavily dependent of the choice of assumptions concerning growth rate during the high growth and stable growth and discount rates for each period.

• Almost two-third of the total valuation is depend on the estimation of the residual value or the value of cash flows beyond the tenth year which is likely to be less accurate than estimation of cash flow during the earlier years of the forecast period.

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Recommendations

Other sources of profitable revenue could be considered such as selling additional products and services to the Excite customer base and revenue from selling AD space on the site.

The analyst could examine recent transaction of similar companies or consider market valuations of similar companies in the industry. The latter would have to be adjusted to reflect premiums paid for these types of companies.

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“Sastavi”