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<DAILY TROUBLE>
Friday, May 28, 1999
Ziff-Davis Inc.
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Website:
www.ziffdavis.com
Phone:
212-503-5477
Price
(5/27/99): $13
HOW DID IT FIND TROUBLE?
Does pain compute? Ziff-Davis was supposed to be the quintessential Internet stock. In a world hungry for technology information, Ziff-Davis was serving it up by the heaping spoonful. If you wanted to read up on computer happenings you would pick up PC Week or PC Computing. At home, you, along with 11 million other homes, could tune into ZDTV for some Information Technology programming. If your ambitions ran deeper, you could attend one of the company's trade shows and conference events like JavaOne.
All this and the company also owned www.ZDNet.com, a popular online gateway to news and entertainment. Sensing that Wall Street wasn't paying attention to the company as a whole, Ziff-Davis decided to showcase itself in pieces. ZDNet <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZDZ)") else Response.Write("(NYSE: ZDZ)") end if %> began trading two months ago as a tracking stock for the company's online endeavors. The market responded wildly, bidding up the shares to $29 a pop. Oops, did someone say pop?
In a classic case of selling on the news, even as ZDNet soared on its March 31 debut, Ziff-Davis was rocked for an $8 loss. And once ZDNet began to lose its buoyancy, it dragged Ziff-Davis down even further. Adding insult to injury was a March quarter that found sales coming in lower than the year before. As Ziff-Davis suffered due to softness in technology advertising and fallout from killing off three of its publications, the poor financials cut the intended feast short. Sure, Wall Street was hungry, but Ziff-Davis was serving up indigestion.
BUSINESS DESCRIPTION
Ziff-Davis, founded in 1927, is a media and marketing company whose mission is to "build and facilitate Content, Community and Commerce across the technology marketplace and the Internet Economy."
It is the country's largest publisher specializing in computer periodicals. Its PC Magazine is the world's most popular personal computer magazine, with a circulation base rate of more than 1.2 million. The company also puts out another 80 periodicals, including Macworld, Computer Shopper, and Yahoo! Internet Life.
Ziff-Davis is also a knowledge facilitator through its trade shows, conferences, and educational outreach efforts. The company has retained an 84% stake in ZDNet.
FINANCIAL FACTS
Income Statement 12-month sales: $1095.0 million 12-month income: $79.2 million)* 12-month EPS: ($0.78)* Profit Margin: N/A Market Cap: $1313.0 million (*excluding charges) Balance Sheet Cash: $38 million Current Assets: $322.1 million Current Liabilities: $366.3 million Long-term Debt: $1501.9 million Ratios Price-to-earnings: N/A Price-to-sales: 1.2
HOW COULD YOU HAVE SEEN IT COMING?
How does a tracking stock derail its parent company? On the surface it did not make sense. With 11.5 million shares of ZDNet sold, Ziff-Davis was able to pocket $200 million and pay down its large debt load. Not bad. At its peak two months ago, ZDNet's market cap nipped at $4 billion. Yet Ziff-Davis itself, laying claim to $3.4 billion of that market cap, closed out the day with a market valuation of just above $2 billion. Not good.
But go beneath the surface and you will find why the market valued Ziff-Davis, even with an 84% stake in ZDNet, substantially lower than its headstrong offspring. Beyond a tax-free distribution to shareholders, a complicated process that is not always possible, Ziff-Davis would never have realized that $3.4 billion stake's full value. If ZDNet were to be bought out for cash, it would have been a taxable event. Even if it were taken over in a stock deal the company's low cost basis would eventually meet up with the tax take.
There is also the case of enterprise value. ZDNet tracks the online business, sans debt. For Ziff-Davis one would have to tack on the $1.3 billion in debt to get a clearer picture of its true valuation. Shares of Ziff-Davis had risen beyond realistic expectations stemming from the ZDNet stock offering. Back in October Ziff-Davis traded as low as $3 5/8. Overdone. Overbought. Over.
WHERE TO FROM HERE?
I want my ZDTV! That's what Paul Allen said back in February when his Vulcan group bought a third of the cable and mini-dish network for $50 million. Allen, who with Bill Gates was a co-founder of Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>, also invested $50 million in Ziff-Davis itself. So with the company's majority stake in ZDTV worth at least $100 million, and, even after a sharp correction, the market still dictating a $1.2 billion price tag on Ziff-Davis' 84% stake in ZDNet, is Ziff-Davis serving another value buffet?
With familiar publications like FamilyPC and Yahoo! Internet Life each with more than 500,000 subscribers, and PC Computing and PC Magazine each claiming twice as many readers, Ziff-Davis is certainly an impressive periodical publisher.
Despite the debt, it is also still the more cautious way to play the success of ZDNet, which includes popular sub-sites like GameSpot.com. Profits for Ziff-Davis aren't expected to come any time soon. However, with a tempting assortment of assets, it might very well appease the hunger.
-Rick Aristotle Munarriz ([email protected])
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