Viacom to Acquire Web Company Neopets
June 20, 2005

Viacom Inc., looking to extend its strength in children's television programming to the Internet, struck a deal to buy children's Web company Neopets Inc. People familiar with the matter valued the deal at about $160 million.

Viacom, New York, owns cable channels such as MTV and Nickelodeon, which have a dominant position in TV aimed at teenagers and children. Young people are increasingly turning for entertainment to the Web, where Viacom has a much lesser position. "We follow our audience's behavior," said MTV Networks Chairman and Chief Executive Judy McGrath. "We are absolutely committed to being players in this digital space."

Neopets, a closely held Glendale, Calif., company is part of a wave of Internet companies courting young audiences with games, animated characters and news. Membership on the Neopets Web site, which is free, has grown to more than 25 million from 90,000 in 2000. The site generates annual revenue in "eight figures," Neopets Chairman Doug Dohring said this year, mostly from advertising sales and merchandising.

The deal comes a few months after Viacom Chairman Sumner Redstone promised to invest more money in the Internet as part of an effort to boost the company's growth rate. Under former President Mel Karmazin, who quit a year ago, Viacom took a more conservative approach toward acquisitions.

Mr. Redstone's desire to focus more on high-growth businesses is part of the reason Viacom is splitting in two, separating its slow-growing broadcast TV and radio businesses from its cable channels and film studio. The split, approved by Viacom's board last week, is expected to take effect early next year.

The cable and film company, which retains the Viacom name, will pursue a growth strategy that includes acquisitions such as the Neopets purchase, said Viacom Co-President Tom Freston. He will oversee the restructured Viacom.

Neopets regularly ranks among the top 10 "stickiest" Web sites -- a measure that reflects how much time its users spend on average during the month. Visitors to adopt colorful animals from make-believe species and are encouraged to visit the site regularly to accumulate currency, called Neopoints, by playing games and doing other activities.

While online advertising makes up about 60% of the company's revenue, Neopets is expanding beyond the Web with a line of plush toys sold through Target Corp. and other stores. Time Warner Inc.'s Warner Brothers Pictures is producing an animated feature film based on the Web site's characters, and Sony Corp. is developing Neopets videogames.

Mr. Dohring, a major shareholder in Neopets, said the company held discussions with other potential acquirers and investors before deciding on a deal with Viacom. "I think the best content out there that is being created on the Web is being very closely looked at by media companies," he said. Top management of Neopets, including Mr. Dohring, will remain in their roles following the sale, the companies said. Mr. Dohring will report to Jeffrey Dunn, president of Nickelodeon Film and Enterprises.

Viacom hopes to build the Neopets consumer-products business, said Herb Scannell, vice chairman of MTV Networks and president of Nickelodeon. Consumer products are already a big business for Nickelodeon.