Why create an Internet currency when your company already has access to tons of cash and can print new shares of its own stock to buy whatever it wants? In a word: price. Regular companies’ stock prices are based on things like profits, assets and cash flow. But Internet stocks are about potential, hype and, in many cases, moonbeams. To the extent that numbers matter, they’re numbers like revenues or site visits. Profits? What are those? But big, mainline companies are hot to get onto the Internet, both to expand and to protect what they have now. It’s lots easier and quicker to buy than to build. But buying into the Internet means paying Internet prices. Which will slaughter your per-share profits, regardless of whether you use cash or your own stock. Hence, the need for the type of Internet currency that Disney et al. are trying to create. That way, if things work out, you can trade your Net stock for someone else’s Net stock–not to mention being able to offer Net stock options to Netniks you want to hire.
“If you use your earnings-based stock to acquire a revenue-based property [like an Internet company], they say your earnings are suffering, and they mark your shares down,” Tom Staggs, Disney’s chief financial officer, said in an interview last week.
Or, as GE chairman Jack Welch said in a talk reported earlier this year by USA Today, “We’ve got to get more wampum. That means we’ve got to have more ‘dot.coms.’ Then, we can trade our paper for somebody else’s paper.” (A GE spokesman said Welch wouldn’t elaborate on those remarks.)
Using highly valued stocks to buy solid but less highly valued businesses is as old as the hills. Witness WorldCom’s purchase of MCI last year. But giant, well-known companies trying to coin special, high-octane stocks with which to make acquisitions is a new thing.
So far the only big company that’s successfully played this game is AT&T, which acquired a controlling stake in AtHome in March, when it bought most of the assets of Tele-Communications Inc. AtHome used its supercharged AtHome currency to buy Excite, and is now known as Excite-AtHome. But AT&T didn’t create AtHome, it bought control of an existing company. The other case that comes to mind was Barry Diller’s attempt to have his USA Networks buy Lycos, a deal that was hooted down by major Lycos stockholders. All three of last week’s deals–GE, Disney and Time Warner-Sony–require approval of Net company stockholders. At this point it seems likely, but not a sure thing.
What does seem like a sure thing is that sooner or later, Wall Street’s printing presses and fee-hungry dealsters will create more Internet stocks than even today’s gluttonous investors can stomach. Many Net stocks are way down from their highs, but the machine keeps grinding them out.
Which brings us back to wampum. Even though individuals could make their own wampum, it was in such scarce supply that it kept its value even after lots of European settlers began arriving and started using wampum as a substitute for coins or paper money. For a while you could even use wampum to pay Massachusetts state taxes or Harvard tuition. But in the late 1700s, someone built a wampum factory in New Jersey and flooded the market. Soon after, wampum became worthless as currency. Hmm… Think there’s a moral in here somewhere?
