Answers Corp. (NASDAQ: ANSW) stock got smashed on Friday, dropping more than 23%. The company that via Answers.com provides users with answer-based search services and also operates Wikianswers.com, which is a Q&A platform where users ask various questions and a community of people answers them, is having all kinds of problems trying to finance an acquisition of Lexico, owner of the Web properties Dictionary.com, Thesaurus.com, and Reference.com.

Answers planned to buy the company for $100 million, even though Answers had just $9.2 million in cash at the time of the announcement. Skeptics, like my IOI partner, Zack Miller, just looked at the numbers and wondered how this deal was going to be financed, and it appears that they were correct to be skeptical. Since the announcement back in July, Answers stock is down over 65%.

In a note on Friday, paidContent.org referring to the deal financing said, "a plan to sell 14.94 million shares, raising $100 million. But that was based on the company's Tuesday closing price of $6.69. Since then the stock has been crushed, falling nearly 42 percent to $3.96. At this level, 14.94 million shares would only be worth $58 million, not nearly what it needs to raise to fund the buy. At these prices, the company would have to up the offering to 25.6 million, further diluting the value held by the company's current shareholders."

It looks like if this deal gets done, and I have my doubts that it will, investors are going to see lots more red, as the stock looks like it will be heading much lower.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. Disclosure: Writer has no position long or short in any stock mentioned as of 1/20/08.

MAJOR PAPERS:

• On January 1, 2008 Jeffrey L. Bewkes may be the new CEO of Time Warner Inc (NYSE: TWX), reported the Wall Street Journal. The current president and COO, is expected to take over from Richard Parsons.
• Paetec Holding Corp (NASDAQ: PAET) has paid $492M for McleodUSA, creating a tough rival to AT&T (NYSE: T) and Verizon Communications (NYSE: VZ) for business telephone sales, according to the Wall Street Journal.
• Sony Corporation (NYSE: SNE) is focusing its business on consumer electronics, and may sell its advanced chip production facility, with possible buyers including Toshiba Corporation (OTC: TOSBF) and IBM Corporation (NYSE: IBM), reported the Wall Street Journal.

• The New York Times reported that New York Attorney General Andrew Cuomo is investigating five large energy companies, AES Corporation (NYSE: AES), Dominion (NYSE: D), Dynegy Inc (NYSE: DYN), Peabody Energy Corporation (NYSE: BTU) and Xcel Energy (NYSE: XEL), in order to determine whether their plans to build coal-fired power plants pose undisclosed financial risks that their investors should know about.
  

• According to sources, BuddyTV, a TV community site, is being acquired by Comcast Corporation (NASDAQ: CMCSA) reported PaidContent.org.
• TheInquirer.net reported, citing sources, that Intel Corporation (NASDAQ: INTC) will launch a "famous new platform" this Tuesday.

On May 31st, BloggingStocks' parent company, Time Warner Inc.'s (NYSE: TWX) president Jeff Bewkes publicly mused about taking AOL public, according to paidContent.org.

Bewkes noted that AOL was at a competitive disadvantage due its lack of an "internet public currency." While that currency enabled AOL to offer $166 billion in stock to buy Time Warner back in January 2000, what would it be worth today?

$24 billion. That's one guess made by multiplying my estimate of AOL's 2007 revenues of $6 billion -- calculated by quadrupling AOL's Q1 2007 revenues of $1.5 billion -- by a price/sales ratio of 4. The latter is based on a review of the price/sales ratios of comparable pure-play internet content firms such as:

• Yahoo! Inc. (NASDAQ: YHOO): 5.9
• CNET Networks, Inc. (NASDAQ: CNET): 3.5
• Baidu.com Inc. (NASDAQ: BIDU): 37.1

I think such a public offering could unlock value because at $24 billion, AOL would be worth 30% of TWX's current $80 billion market capitalization, even though it represents only 12.5% of TWX revenues and a mere 4% of its assets. Moreover, AOL stock could motivate staff and fuel acquisitions.

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Time Warner stock.

This week, the Wall Street Journal wrote about how venture capital is starting to seep into the blogosphere ("Bloggers Find Financial Backers For Their Independent News Sites").

Deja vu  all over again?  Interestingly enough, back in the 1990s, there was a flood of money that flowed into content deals. Yes, some journalists were becoming dot-com multimillionaires. However, when Nasdaq collapsed, so did many of these ventures.  In fact, there was a book on the topic -- Starving to Death on $200 Million – which chronicled the implosion of the Industry Standard.

So, to use an ominous phrase:  is this time different?  Perhaps so.  Actually, the attraction of blogs is that they are fairly low cost.  This makes it possible to make money from niche categories.  Also, it is fairly easy to scale-up (since bandwidth is extremely cheap).

Some examples of recent financings:  Alan Patricof, who invested in Apple at the start-up phase, has put his own money in PaidContent.org; True Venture Partners invested in GigaOm.com, a popular blog by Om Malik, a writer for Business 2.0 (which is a publication of Time Warner); and Mark Cuban, who sold Broadcast.com to Yahoo!, invested in Sharesleuth.com.

Yahoo’s consumer tech site launched Sunday night, points out Paidcontent.org, noting that the site is headed up by Patrick Houston, Yahoo's general manager for technology--and the former editor-in-chief of CNET. Paidcontent's initial react? "Still a work in progress," writes Staci Kramer. "Gives Yahoo denizens a destination and some nifty features but wouldn’t be the first stop for CNET vets. Then again, I’m not sure it’s meant to be. "