Homeward Bound: The Inside Story of the AtHome-Excite Deal

Baldwin Louie — Mon, 01 Feb 1999 17:00:00 -0500

It was the morning of Jan. 14, and Tom Jermoluk was ticked off. For a month, the boyish, irascible CEO of AtHome had been negotiating to buy Excite (ATHM), the company's next-door neighbor in Redwood City, Calif. For the first time, though, the talks seemed out of sync. Excite CEO George Bell was also negotiating with Yahoo (YHOO), sometimes talking with Tim Koogle, Jeff Mallett and Jerry Yang one hour and Jermoluk the next.

To the fiery Jermoluk, a 6-foot-4-inch Silicon Valley golden boy, it seemed AtHome wasn't Bell's first choice.

"What I want from you guys is for you to show me that you're serious about working with us, and [that] we're not just a second option," Jermoluk told Bell, according to another person involved in the talks.

Not long after Jermoluk's ultimatum - that same afternoon, in fact - Bell huddled with Excite's board. They decided to give Jermoluk a chance to close a deal without interruption from rival bidders. Jermoluk suggested a 6 p.m. meeting at Wilson Sonsini Goodrich & Rosati (dossier), the law firm representing AtHome on the deal. Bell agreed and brought Excite's lawyers from Fenwick & West.

The executives, lawyers, bankers and accounts descended on Wilson Sonsini's Palo Alto offices. Excite's team huddled in one room, AtHome's team in another down the hall. Connected to both of those rooms is a third room, where Bell and Jermoluk spent six hours hammering out the details of a merger. About midnight, a grim-faced Jermoluk stomped from the main meeting room shouting angrily at Bell, "... and don't even think about calling me again!"

The blood drained from the faces of his associates.

He was kidding. Bell and Jermoluk had closed the deal.

That concluded a frantic month in which both companies had talked merger with a variety of potential partners. Excite held talks with Microsoft (MSFT), Yahoo, Sony (dossier) and America Online (dossier). AtHome, meanwhile, held what Jermoluk calls "serious" discussions with two media entities. Despite their geographic proximity and their common membership in the club of Silicon Valley firms backed by venture capital power Kleiner Perkins Caufield & Byers (dossier), it was only late in the game that the two companies - partly at the urging of Kleiner partner John Doerr - seriously considered one another.

In the end, AtHome agreed to acquire Excite, worth $6.3 billion at the close of market last Thursday. (Terms of the agreement call for each Excite share to be exchanged for 1.041902 shares of AtHome.) It's the biggest deal in the short history of the Internet and eclipses the $4.2 billion in stock AOL (dossier) will issue to buy Netscape.

The deal, expected to close in three months, dramatically changes AtHome, which until now has focused on providing Internet access via cable television networks. The acquisition expands the company's business into the narrowband world, giving it one of the most visited sites on the Web and a better-known consumer brand. Jermoluk says AtHome has tentatively decided to rename its consumer cable service Excite AtHome. The company also plans to replace the current AtHome opening screen with a version of the Excite home page, which Jermoluk says has 90 percent more functionality than AtHome's. Buying a portal, rather than trying to build one, saved the company two to three years, he contends.

Jermoluk also seems excited about acquiring MatchLogic, an Excite subsidiary with expertise in targeting online advertising. Some observers see the deal as a sign broadband Internet access is coming of age; cynics might conclude that AtHome is hedging its bets against any slower-than-expected consumer acceptance of Internet access over cable. Jermoluk says he first saw the need to cozy up to a Web media company a year ago, when ATT (T) announced plans to buy the cable giant Tele-Communications Inc. TCI owns 39 percent of AtHome, and thus the deal meant the phone behemoth would soon be AtHome's controlling shareholder.

Not long after that, Bell and Jermoluk met informally, without specifically discussing a merger. But the late November announcement of America Online's proposed acquisition of Netscape scared both CEOs. Jermoluk was convinced he had to find a content partner, and fast. Starting with a wide search, AtHome quickly narrowed the field to six potential partners, and then whittled the list to three in December.

Just before Christmas, Jermoluk got his board's permission to conclude a deal with any one of the three finalists, though he claims that "all along, Excite was the No. 1 choice." Jermoluk says it made more sense to buy a content company rather than set up a partnership. "That's easy," he says with a characteristic wave of the hand. "A merger means you have alignment. It means that when you need to implement a strategy, you never have to question your partner to make sure they don't have a conflicting strategy. We have the same profiles, interfaces and technology."

Bell, meanwhile, was also analyzing the consequences of the AOL-Netscape deal and trying to determine if Excite, as it was then configured, could grow fast enough to keep up. His conclusion: Excite couldn't go it alone.

"There was no point for us to try and out-Yahoo Yahoo," says Bell, who already sports a watch with the AtHome logo on the face. "There was just no breakout strategy there, and I felt really burdened by that."

In the first week of December, John Doerr stepped in. The Kleiner partner played a key role in launching AtHome and sits on the company's board. He encouraged Bell to talk to Jermoluk about a possible partnership. Excite's board includes Kleiner's Vinod Khosla.

Bell says he'd never thought of AtHome as a potential parent company, though he thought a content-distribution deal might make sense. Jermoluk shared with Bell how much AT&T planned to spend on upgrading TCI's cable systems. Bell says those discussions got him thinking about a closer relationship with AtHome.

By this time, Bell was not only talking with AtHome, but also with Microsoft, Yahoo, AOL and a major media company, which sources say was Sony.

Correction:
In an earlier version of this story, Wilson Sonsini Goodrich & Rosati was identified as AtHome's law firm. In fact, the firm represented AtHome only on this deal. Fenwick & West is AtHome's law firm of record.

The talks with AOL and Sony fell apart in mid-December. Bell won't confirm that he talked with Sony, but he does say he was worried that partnering with a major media company would turn into a bureaucratic nightmare, and that Excite would ultimately lose control of its business.

"I was hesitant to give up control of our business to a non-Internet major player," Bell says. "I've gotten too many resumes on my desk from Starwave and Infoseek (dossier) employees to do that," alluding to the complex deal that gave Disney a large stake in Infoseek.

With Sony and AOL out of the mix, Excite focused on deals with Microsoft, Yahoo and AtHome. Canceling his holiday vacation plans, Bell began serious talks with all three companies. The key issues: the future role of Excite's management and, of course, price.

During the first week in January, Microsoft dropped out of contention. For one thing, Bell had concerns about regulatory complications, given the ongoing Justice Department antitrust case against Microsoft. Bell says he also worried that Excite's identity would disappear inside MSN. A Microsoft spokesman refused to comment on the discussions, but said the company does have a stake in Comcast (CMCSK), which has a 12 percent stake in AtHome.

That left Yahoo and AtHome. Until that point, Bell says, the talks with Yahoo had gone well. Yahoo agreed to raise its offering price. Some Excite board members had dreamed of an Excite-Yahoo deal for years, and their goal finally seemed within reach.

But on Jan. 9, the dynamic changed. According to a source close to the talks, Yahoo changed its tactics as the two companies tried to finalize a price. "Their negotiating style went from being very open to one of gamesmanship," says the source. Yahoo's Mallett wouldn't comment.

Talks with Yahoo continued through the next week, right up to Bell's Thursday evening handshake with Jermoluk. But Bell says that the previous Saturday's session with Mallett, Koogle and Yang convinced him he couldn't complete a deal with Yahoo.

After that meeting with Yahoo, Bell met with Jermoluk. Jermoluk increased AtHome's bid. After four more exhausting days of talks with both Yahoo and AtHome, Bell and Jermoluk shook hands on a deal. Both parties insist the agreement is solid: "Once we did the deal, it was done, no collars, no walkaways, no nothing," Jermoluk maintains.

One important player in the deal wasn't actually at the negotiating table: AT&T CEO Michael Armstrong. But he was a looming presence.

"I talked with Mike Armstrong throughout the negotiations about overall strategy and how the deal fits with AT&T's plans," Jermoluk says. The plot thickened last Friday, when rumors emerged that AT&T might sell its WorldNet ISP to AtHome.

Monday morning, as execs from AtHome and Excite traveled to the airport for a flight to New York, where the deal was announced last Tuesday morning, Bell talked with Armstrong by phone. "George's call with Mike was a part of AT&T's basic due diligence, and to let him know Armstrong was committed to the value of Excite," Jermoluk says.

AT&T, once an Internet also-ran, suddenly becomes a real online powerhouse, with controlling positions in both the leading broadband ISP as well a top-tier Web portal. While AOL remains the clear leader in dial-up access, the deal makes the AT&T- AtHome tandem a rather formidable competitor.

Certainly, AtHome has the strongest position in cable modems, with 331,000 subscribers. Road Runner, a Time Warner (TWTC) venture, is a distant second, with about 160,000 Internet cable subscribers. AtHome says its service now passes 13.2 million cable subscribers, a figure that could grow to 23 million by the end of 1999.

While not an intuitively obvious combination, there's a cultural logic to the deal that's unusually powerful. Both firms were Kleiner start-ups launched at around the same time. They're situated next to each other in an industrial area in Redwood City, Calif., just west of U.S. 101. Their offices were designed by the same architect and look amazingly alike, right down to the slides between floors.

With almost no business overlap, they expect no layoffs. AtHome, in fact, has been planning a steady expansion - the company is constructing four new buildings adjacent to its current headquarters.

While some observers, including Yahoo (YHOO) President Jeff Mallett, have characterized the merger as a "Kleiner deal," both CEOs downplay the Kleiner Perkins connection.

It's certainly all in the family. As the deal was announced on Tuesday, Kleiner hired an airplane to fly a sign over the soon-to-be-combined campus that read, "Congratulations T.J. & George."

The AtHome-Excite (ATHM) deal may have thrown some people for a loop, but we're betting that more unpredictable Net marriages will follow. Here's a peek at what could be inside the shopping carts of the Internet Economy's leading players ...

Shopper: Microsoft (MSFT)
Possible Target: Lycos (LCOS)
Thanks to the serendipitous confession of a Lycos veep last week, it's now official: Lycos is negotiating. Lycos ostensibly wants a deal in which a partner takes a 20 percent stake. Don't be surprised if Microsoft takes the whole enchilada.

Shopper: CBS (dossier)
Possible Target: LookSmart (LOOK)
CBS will certainly enter the portal wars. But how? A few weeks ago, The Standard speculated about CBS buying Yahoo, or maybe vice versa (Dec. 28, 1998 - Jan. 4, 1999). With Yahoo priced at $30 billion-plus, it's just not likely. Other networks have tried to buy into portals on the cheap: NBC chose to go with a build-it-yourself kit (Snap), and Disney engineered a deal with Infoseek (dossier), in which Infoseek practically paid to be bought.

Shopper: America Online (dossier)
Possible Target: eBay (EBAY)
Just because AOL (dossier) ended 1998 with a bang, don't expect the fireworks to end there. EBay is to the garage sale what AOL is to the home PC. Combine the two and you've got Main Street, USA. The online auctioneer has already cozied up with AOL in a three-year, $12 million distribution deal. AOL could own the auction market by adding eBay to its portfolio.

Shopper: Yahoo
Possible Target: GeoCities
Yahoo has demonstrated that it can create active forums on the Net without a big outlay of cash. But it lacks a home-page-hosting service - a feature considered de rigueur for Web "communities." Meanwhile, both GeoCities and Yahoo count Japanese holding company Softbank as a major backer - which makes them members of the same familia.

Shopper: Bertelsmann (dossier)
Possible Target: CDnow (dossier)/N2K
Three cheers for "disintermediation"! Remember how publishers were going to replace stores in the brave new world of the Net? It can still work. Take four parts Bertelsmann, one part CDnow and you've got a plausible combination. The bonus is that Bertelsmann owns half of Barnesandnoble.com, soon to go public. If Bertelsmann makes more acquisitions, look for a deal in which much of the price is paid in Barnesandnoble.com stock.

Shopper: Amazon.com (AMZN)
Possible Target: Xoom
No players have yet followed Yahoo - the proud new owner of Web marketing company Yoyodyne - into the new world of direct mail on the Web, but no doubt many will. Russell Klein, an analyst at Broadview Associates, suggests a natural match for Amazon.com is Xoom, which combines a good direct marketing platform with portal features.

Shopper: Charles Schwab
Possible Target: Datek Online
Let's face it, our friendly discount broker is an Internet company. With more than 60 percent of its business transactions taking place online in the most recent quarter, Schwab has to face it, too. In combination with Datek it would make up nearly 50 percent of the market and leave other players scrambling. The day trader meets the Roth IRA online?

- Megan Barnett and Mark Gimein

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Homeward Bound: The Inside Story of the AtHome-Excite Deal