Don't short junk - implications of News Corp's purchase of Intermix (NWS, MIX)

News Corp (ticker: NWS) announced that it is acquiring Intermix Media (ticker: MIX) for $580 million. At the same time, Intermix announced that it will acquire the 47% of social networking site MySpace it doesn't already own for $69 million. Implications and reactions:

Implications:

• The number of acquirers of Internet companies is growing. News Corp. is the fourth traditional media company to make a significant Internet acquisition in the last year. Dow Jones' acquired MarketWatch for $528 million; The New York Times' acquired About.com for $410 million; and E.W. Scripps acquired Shopzilla for $525 million. They join the group of large cap Internet companies that are acquirers themselves: eBay, IAC, Google, Microsoft, Time Warner (AOL), The Sabre Group, and Yahoo. Who's next to join the party? Perhaps Gannett (ticker: GCI), Tribune (ticker: TRB), or Knight Ridder (ticker: KRI). The increase in the number of acquirers is great news for investors in Internet stocks, as it will result in higher purchase prices.

• Solid companies will accept junk to get quality. News Corp is clearly interested in Intermix for its soon-to-be-100% stake in MySpace. But Intermix also owns other web properties of decidedly lower quality. Intermix is the first Elliot Spitzer target in the Internet space, and has settled the suit alleging that it peddled adware and spyware. Even its "clean" sites are of questionable quality: ClickZ describes Intermix site Flowgo.com as  "a site featuring low-brow humor such as "The Tootin' Cousins Bathtub Duet" where computer enhanced babies pass gas while singing in the tub". Why does this matter? It shows that solid companies like News Corp are prepared to purchase junk if that's the only way to get their hands on higher quality Web properties. IAC similarly acquired Ask Jeeves, despite the fact that Ask Jeeves owns sites that spyware expert Ben Edelman says are clear adware violators. And Microsoft is rumoured to be looking at adware vendor Claria.

All this has clear implications for shorting Internet stocks: you can't short stocks due to questionable business practices if the company might be acquired at a premium for its clean properties. And with the number of potential acquirers growing, the premiums are increasing.

Other reactions:

The Financial Times

MySpace.com users tend to spend a lot of time on the site, which offers chat rooms, blogs, music sharing and other “social networking