GeoCities, the Marina del Rey company that pioneered the business of building communities on the Internet, won a major endorsement of its Internet strategy Thursday when it agreed to be acquired by Yahoo in an all-stock deal valued at $3.9 billion.
The agreement, which combines two of the World Wide Web's most popular destinations, would be the largest acquisition involving a Southern California Internet start-up. It also would solidify Santa Clara, Calif.-based Yahoo's position at the head of the portal pack.
Company executives said the deal would pool two sites that together reach nearly 60% of Web surfers, expanding opportunities for electronic commerce and targeted marketing. It would also augment Yahoo's wildly popular Internet directory with GeoCities' resources for building free home pages on the Web.
"Publishing and formation of communities are big, and they're here to stay," said Yahoo President Jeff Mallett.
GeoCities has attracted more than 3.5 million "homesteaders" who have created more than 34 million pages of personalized content since its founding in November 1994. The company provides the Web space at no charge; groups the pages into themed "neighborhoods" such as sports, entertainment and business; and makes money by selling ads that appear on the homesteaders' pages.
"People are looking for two things" on the Web, said David Bohnett, GeoCities' founder and chairman. "They're looking for an opportunity to meet others of similar interests, and they're looking for a way to contribute and participate in this medium."
Still, the company, which went public in August, has yet to make a profit. GeoCities said Thursday it lost $8.4 million, or 27 cents a share, on revenue of $75 million in the quarter ended Dec. 31. Altogether, the company lost $19.8 million in 1998, compared with a loss of $8.9 million in 1997.
"There isn't any evidence that a community site by itself will make money for anybody," said Michael Murphy, editor of California Technology Stock Letter in Half Moon Bay, Calif. "You have to have a community that is willing to pay for stuff."
Yahoo and several other portal sites are betting that they can turn those communities into shoppers. Lycos last year bought Tripod and AngelFire, which both give away home pages. Excite launched its own community-building service in September, and the new Go Network--unveiled by Infoseek and Walt Disney this month--offers free home pages as well.
"Community is an important, intrinsic piece of any portal, or Web-based online service," said Patrick Keane, an analyst with Jupiter Communications in New York. "But stand-alone communities as independent business ventures cannot survive on their own. GeoCities, the No. 1 player in this entire space, has all but admitted that."
But GeoCities executives said they felt vindicated by the price their company fetched. Yahoo will pay 0.3384 share for each GeoCities share. That valued GeoCities at $124.45 a share based on Yahoo's closing price Thursday, a 66% premium over GeoCities' stock price before the deal was announced.
On Thursday, shares of GeoCities rose 56%, from $75 to $117.25 in Nasdaq trading. Yahoo stock rose $31.88 to close at $367.75 on Nasdaq. The deal is subject to approval by regulators and GeoCities shareholders.
One of Yahoo's goals is to make the GeoCities service available to a lot more people beyond its base in North America and Japan, said Yahoo Chairman and Chief Executive Tim Koogle. Yahoo's directories are already available in 15 languages.
The two companies will integrate their technologies for personalizing and editing Web pages, said Tom Evans, president and chief executive of GeoCities. Some of those tools allow users to create buddy lists with their online friends, receive stock updates, place classified ads and sell merchandise on their own Web sites.
Yahoo executives said GeoCities will continue to operate as a separate brand and will most likely maintain its offices in Marina del Rey, where 270 people now work. Mallett said he plans to integrate key functions such as sales, but that GeoCities' production, engineering, design and editorial teams will probably remain independent since their jobs don't overlap with any at Yahoo.
It will take three or four months to sort out the details, but Mallett said no layoffs are planned.
GeoCities employees--many of them shareholders--reacted with enthusiastic cheers and applause and watched with glee Thursday as the company's stock price climbed.
"I give it a thumbs up," one excited employee said of the deal. "Yahoo is a great company. It's the No. 1 site on the Internet and they have a great corporate culture."
Yahoo and GeoCities began talking about a combination on Jan. 15, the day GeoCities became eligible to do a tax-free pooling-of-interests deal. Details of the acquisition were settled on at meetings in Santa Clara over the weekend, and executives spent the first part of the week talking to their directors and accountants and working out other details.