After Ziff, other publishers consider Web-unit IPOs

Folio: The Magazine for Magazine Management, Feb, 1999 by Dzintars Dzilna, Teresa Ennis

Editorial director Tony Silber contributed to this report.

Ziff-Davis' move to cash in on sky-high valuations of Internet companies through an IPO that will track its ZDNet Internet operations has magazine-industry observers wondering whether other publishers will see the Ziff move as an opportunity for them, too.

"Buried within companies like ours, like Hearst, like Conde Nast are lots of Web businesses that may be undervalued," says Brian E. Kardon, senior vice president, marketing, for Cahners Business Information. He adds that Cahners is not actively considering a Web-business IPO now. "This is a way for investors to get a pure play."

And it's a way, say publishers and industry analysts, for publishing companies to raise money, to clarify their positions on Wall Street, to retain staff and to insulate their print publishing operations from market vagaries and losses associated with Web start-ups. "As long as prices are so high, publishers that have something successful online are going to try to benefit from that," says Dan Ambrose, a managing director at the New York-based merger and acquisitions firm DeSilva & Phillips. Companies that may be considering a move similar to Ziff's, say either industry observers or executives at those companies, include CMP Media, Time Inc., IDG and Hachette Filipacchi Publications.

Ziff last month filed for an IPO under which it would sell 20 percent of ZDNet, raising as much as $115 million. The unit will not become a company entirely distinct from the parent company, however, and voting rights associated with ZDNet will fluctuate according to the new stock's value in comparison to the value of Ziff-Davis stock, according to the filing. In early January, Ziff was trading in the $17 to $18 range, and in the days after the December 22 announcement, the stock increased by 72 percent, from $13.62 to $23.50.

The move comes amid several recent IPOs that underlined the high valuations Wall Street puts on Internet companies. Earthweb Inc., for example, a provider of online services to IT professionals, went public late last year, has traded as high as $85, and was trading in the $37 range in early January. Based on that price, the company has a market capitalization of about $222 million, even though it is reporting annual revenue of $1.1 million and a net loss of $7.8 million. Says Cahners' Kardon, "If you want to invest in a magazine company, you get a certain type of risk, and if you want to invest in an Internet company, you get a different kind of risk and a different kind of return."

One company that has already aggressively presented to Wall Street a separate financial profile for its online operations is Playboy Enterprises, which in its financial reporting breaks out the performance of its Internet business and stresses revenues over earnings. Reports last month that it was exploring a spin-off of its Internet unit generated a 23 percent spike in Playboy's stock, which increased from $17.12 to $21.12.

At Time Inc., which operates the Pathfinder Web network, new-media president Dan Okrent says that the company is talking about such a move, but that there are no immediate plans. "It's tempting, given the valuations," he says. "We say, 'Jeez, if only we were out there, we would be able to reap the benefits of what is happening in the market right now.' But we're able to fund what we're doing in that area right now, so there's really no need for us to spin that off separately."

Cahners' Kardon says the same thing: "You do this if you need money," he says. "Cahners does not need money." He added, however, that in terms of business strategy, a separation of Internet operations from the traditional print businesses might help generate a buzz that would pay off in brand-building and name recognition. Also, he says, a Web-only operation may have more appeal for young professionals for whom traditional publishing has little appeal. "There's a real cultural dilemma within traditional magazine companies," Kardon says.

Jim Docherty, president of new media for Hachette, says an added benefit of a Web-unit spin-off is protection of the core publishing operations. "For most for us, our primary business is print, and this is a way, given the possibility of volatility in the market, of insulating our primary business from any harm," he says. "It also gives us the ability to profit from any possible gains. It's a strong option. I think it's going to happen more and more frequently."

Others aren't as convinced. "To do it, I think you have to have a large-enough business and something that can be run autonomously," says Tom Kemp, CEO of Penton Media, which has a minority stake in the Internet.com Web-industry hub site. "I think the way that a lot of traditional magazine publishers are operating is that their Web sites are closely integrated with their magazines."

                          Tracking Ziff and ZDNet

           REVENUES  LOSS
Ziff-Davis $730.5m  $86.1m
ZDNet       $37.6m   $7.7m


ALL DATA FOR NINE MONTHS ENDING SEPT 30, 1998
SOURCE: COMPANY REPORTS