One Year Ago: eBay Broadens Scope with Half.com Buy

Online auctioneer eBay has expanded into the fixed-price marketplace by agreeing to purchase person-to-person Web marketplace Half.com in a stock deal valued at US$350 million.

Half.com sellers simply enter the ISBN code for a book or a UPC code for a CD, video or movie, describe the condition of the item, and select a fixed price that is half-off the list price or below.

The Conshohocken, Pennsylvania-based company was founded in July 1999 and opened its site in January 2000.

Half.com is the 18th most visited shopping site on the Web, according to PCData, lists more than four million items for sale, and has 250,000 registered users. According to Media Metrix, Half.com is among the fastest growing e-commerce sites on the Web.

Half Life

"Half.com's fixed-price format complements eBay's current business by giving our existing users new choices for trading," said eBay president and chief executive officer Meg Whitman.

According to Whitman, it would have taken eBay three to nine months to technically duplicate Half.com's Web site. However, Whitman admitted that it would have been impossible to duplicate the community of users that is the real strength of Half.com.

Taking Stock

Analysts agree that by acquiring Half.com, eBay will be able to compete in the fixed-price format, which is becoming an increasingly popular online auction niche.

In published reports, Merrill Lynch analyst Henry Blodget said eBay will gain a new audience of buyers as a result of the acquisition. "There's some crossover in the sellers, but there's very little crossover in buyers," Blodget pointed out.

Anthony Noto, an analyst who covers e-commerce companies at Goldman Sachs, called the acquisition "positive," and reiterated the stock's position on his firm's recommended list. Analysts at Chase H&Q and Prudential Securities also repeated strong buy recommendations on the stock, and Robertson Stephens raised the stock to strong buy from buy, according to wire reports.

Yet eBay shares were lower in morning trading. The stock was down 2 7/16 at 65 9/16.

Broad Appeal

"The acquisition expands eBay's addressable market and should help accelerate growth," Noto wrote in a research note. "The addition of a fixed-price platform will help eBay appeal to a much broader range of buyers and sellers."

Noto also lowered his forecasts for earnings this year to 17 cents per share from 20 cents. eBay said that while the acquisition means significant increases in operating expenses over the next several quarters, it will add to earnings in 2001.

According to Noto, the company will take a $4 million charge to cover costs of the acquisition.

Good Fit

"We continue to view eBay as the best public example to date of a profitable Internet commerce model," wrote Noto. Half.com is a good fit, he said, because the company's transaction-driven business model is similar to eBay's. The online auction company can "provide significant leverage to Half.com's value by accelerating Half.com's growth via the network effects of eBay's community and the liquidity of its trading platform," he said.

eBay said it expects to complete the acquisition in the third quarter and will issue between 4.6 million and 5.5 million shares to buy Half.com. Goldman Sachs' Noto said the price is justified because Half.com could have held out for an initial public offering in 2001 with a significantly higher valuation.

No Sudden Changes

Half.com will remain a separate site, at least for now. "Let me reassure you that we won't be making any sudden changes," Josh Kopelman, the company's founder, president and chief executive, wrote in a letter posted on the site.

Infonautics Inc. (Nasdaq: INFO) owns a minority stake in Half.com, and said it will get between 140,000 and 175,000 eBay shares from the deal. Shares of Infonautics, a Wayne, Pennsylvania-based Internet investor, were up 15/16 in morning trading at 4 29/32.

Half.com is also the name of a town in Oregon. According to January press reports, the town of Halfway changed its name to Half.com in exchange for a $110,000 donation from the company in the form of funds, Web services and computers for the town's elementary school.