Insatiable Arbs
The arbs, short for arbitrageurs, have arrived and are circling their next prey -- EarthLink. And Dana's come to a reluctant conclusion.
I’ve come to a reluctant conclusion.
Business journalism shouldn’t be done in New York.
Financial journalism — that’s another thing. There’s a difference.
Business is about the struggle to make money by building companies that deliver value to customers and keep people employed. Finance is about trading businesses like Pokimon cards and making money for traders.
I was reminded of this again over the last week when the stock price of my Internet service provider (ISP), EarthLink, started rising and Business Week (which claims to be a business magazine but, as you will see, is based in New York and, thus, is a finance book), revealed the reason why.
The arbs have arrived. Arbs, short for arbitrageurs, buy companies when they’re down and then try to get them “taken out,” merged into other companies, to the arbs’ profit.
Never mind that most mergers don’t work on the acquiring company’s bottom line. Never mind that high-tech mergers are especially dicey. Unless you’re buying promising technology (and have the capital to exploit it), there’s nothing to buy.
What are you really buying? With a steel company or a cereal company, there are production facilities, trademarks, distribution arrangements, and satisfied customers who won’t switch their habits just because the owner is new. (Despite this, such mergers often fail because the new owners don’t know how to run what they’ve bought.)
In a technology company, everyone can leave quickly. The workers — especially those managers who created the company — can walk out in a heartbeat. The customers have plenty of alternatives.
Despite all this, the arbs keep trying. Their latest work of art is Terra Lycos. This was the merger between a unit of Spain’s Telefonica phone company and Lycos, the Web portal that also owns such sites as Tripod, HotWired, and HotBot.
By all reports, the merger has been a disaster. The company lost $507 million in its 2000 fiscal year. Lycos’ top executives, including chairman Bob Davis, quit. The company thinks a new ad campaign starring Anna Kournikova will change that. (Yes, I think they’re insane, too.)
So why are arbs circling EarthLink? “If subscribers are forced to see that home page every time they log on to the Internet, advertisers are going to want to be there,” Yankee Group ISP expert Rob Lancaster told Business Week.
But EarthLink is a paid service. Its home page is not locked down. There’s a lot more to AOL than a home page (and AOL isn’t an ISP, by the way — it resells WorldCom access). What Lancaster must mean is that a new “media company” owner would force EarthLink users to start with a new home page pushing their stuff, and we’d all go on to buy it like sheep. (As Tweety Bird would say, “He don’t know we very well, do he?”)
Concluded Business Week writer David Shook, “With the rest of the sector’s outlook remaining in doubt, this could be a chance for EarthLink to give investors a nice surprise.” Not “investors,” David, “arbs.” If you want to return to business journalism, do yourself a favor. Get out of town.
