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Classmates.com offering is called off

December 13, 2007|Jessica Guynn | Times staff writer

SAN FRANCISCO — United Online Inc. on Wednesday shelved what would have been the first initial public offering for a social networking site.

The Woodland Hills-based Internet company cited an unfavorable climate for IPOs in withdrawing its planned spinoff of Classmates Media Corp., whose Classmates.com website helps connect former friends from school, work and the military.

But analysts said the offering was flawed and wasn't well-suited to cash in on the success of online social networking, whose leaders include News Corp.'s MySpace and Facebook Inc.

United Online shares fell $1.07, or 8.7%, to $11.25 and are down 36% since reaching a 52-week high of $17.60 on Oct. 31.

It bought Classmates for $100 million in 2004 and had hoped to raise as much as $144 million, before banking fees, by selling 12 million shares on Nasdaq. It was to remain the controlling stockholder.

Instead, United Online withdrew the offering and said it planned to take a fourth-quarter charge of up to $5.5 million.

"United Online has determined that proceeding with the initial public offering under current market conditions would not be in the best interests of its stockholders," the company, which also owns Internet service providers NetZero and Juno, said in a statement.

Classmates was founded in Renton, Wash., in 1995, well before the term "social networking" came into use for websites that connect people with similar interests. Its chief competitor is Santa Monica-based Reunion.com, which in April raised $25 million in funding. Both charge members subscription fees for at least some of their online services. But the much larger MySpace and Facebook provide many of the same services free and generally offer more features.

By and large, analysts have dismissed Classmates' chances of capturing much investor interest. They say its paid subscription business does not stack up well against its bigger rivals.

United Online pulled the plug on the spinoff because investors simply weren't willing to pay up for a business that might not be sustainable, said Cowen & Co. Internet analyst Jim Friedland.

"At the end of the day, social networks are not all created equal," he said.

Through advertising and subscriptions, Classmates turned a profit of $1.6 million on revenue of $140.1 million in the first nine months of the year, according to regulatory filings. The site retains many subscribers through automatic renewals, a practice that has come under scrutiny by the Federal Trade Commission.

Classmates attracted 11.5 million U.S. visitors in November, down 6% from the same month last year, according to Nielsen Online. During that same period Facebook jumped 89% to 22 million visitors and MySpace gained 7% to 57.4 million.

Friedland, 37, says he discovered the disparity in social networking sites while preparing a report on Classmates' upcoming IPO. He joined Facebook to compare, and used it to quickly get in touch with long-lost high school and college friends -- a task that's supposed to be Classmates' "sweet spot," he said.

"Facebook is the Google of social networking," he said. "And we are seeing the Facebook effect hit Classmates.com's business model."

The turbulent stock markets didn't help Classmates' cause. Other offerings have been discouraged, including that of CampusU Inc., an online marketing company targeting college students that postponed a planned IPO on Monday.

But Scott Sweet, managing director of IPOBoutique.com, said Classmates was held back by issues of its own.

"I'm not sure that even in a better IPO market Classmates would have had the demand that would have enabled it to go public anyway," he said.

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jessica.guynn@latimes.com

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