Are these widgets worth half a billion?

(Fortune) -- A lot of eyebrows were raised on Wall Street in January when two giant investment firms, Fidelity and T. Rowe Price, paid $50 million for a 9.1% stake in Slide, a San Francisco- based company best known as the purveyor of entertainments like SuperPoke, which lets Facebook users "ninja kick" or "bodyslam" or "throw a pillow at" their friends.

What did these bigtime investors see in SuperPoke - and Slide CEO Max Levchin - that could possibly justify giving the company a valuation of more than half-a-billion dollars?

Implausible as it sounds, some very serious people believe that Slide and its "widgets" could be the answer to a problem that everybody in the business of selling ads on the Internet, including mighty Google (GOOG, Fortune 500), has been experiencing of late.

Widgets are small, self-contained programs that can be plugged into a web application like a blog or social network. And in the world of widgets, Levchin's Slide is a giant. The widget factory he built with a portion of his fortune from PayPal - which he co-founded and sold to eBay (EBAY, Fortune 500) in 2002 for $1.5 billion - is now the largest in the world in terms of users (50 million and counting) on the strength of such hits as FunWall, Slideshows, and Top Friends.

A hit in search of revenue

There's no question that widgets are popular with a sought-after demographic- those 18- to 25-year-olds who waste hours playing with the things and beaming them to their friends. But since there are millions of widgets out there, and the vast majority of them are free, where's the money?

Levchin offers two answers. The first has to do with the changing nature of the Web, where social networks are the fashion of the day. Online search - which is where Google does most of its ad business - today accounts for only 6% of what people do online. This leaves a lot of contested ground.

And although those 18- to 25-year-olds are spending more and more time on places like Facebook and MySpace, they're not particularly loyal. They move from one hot spot to the next and don't look back. But wherever they hang out, they tend to find Slide's widgets; with a little tweaking, the tiny apps can be made to work almost anywhere.

Levchin's second answer has to do with how companies measure the success of their ads. The metric Google and most ad buyers use - the page view - doesn't work so well when friends are throwing virtual pillows at one another. Advertisers need a new tool to capture this kind of activity, and Levchin thinks he has one. He calls it engagement.

"The metrics for success," says Levchin, "are going to shift away from who can provide the most reach toward who is paid the most attention."

Rules of engagement

Levchin claims he's in a unique position to measure engagement. He can mine that database of 50 million active widget users for all kinds of behavioral data. Who are these people? Whom do they poke when they SuperPoke? How else do they interact? To advertisers trying to target their messages, this kind of marketing data is gold.

But engagement is not an easy sell on Madison Avenue. Most advertisers still price ads by the number of people who view them. And although they are frustrated by how small the returns are for the banner advertisements they've been running on the web - where the typical "clickthrough" rate is 0.2% - it's a hard habit to break.

"It's going to take a P&G or a Coca-Cola to suddenly say we are shifting our dollars toward engagement for the industry to actually change," says Marc Schiller, founder of digital creative agency ElectricArtists.

Still, engagement seems to be catching on. Nielsen has added a new metric that evaluates the amount of time users spend on a site. Google has a cost-per-action option, and in early March, Microsoft (MSFT, Fortune 500) introduced something it calls "engagement mapping," a program that measures online interactions in branding campaigns.

This is also fertile ground for startups, most of them in Silicon Valley. The No. 2 widget maker, in terms of number of users, is RockYou, whose widget catalog includes SuperWall and Horoscope. Another startup, VideoEgg.com, runs video ads on widgets and charges 50 cents to $1 when someone interacts with them.

Meebo provides an assortment of web-based applications that live on top of its instant-messaging platform. While Meebo can't claim the massive page views of Slide, its IM platform helps keep Meebo's 28 million users on the service an average of 2 1/2 hours a day.

But Slide has the largest audience at the moment, and that makes it popular among media buyers. "They're a good way to get widgets into people's hands in a short period of time, rather than wait for grassroots adoption of a widget you make yourself," says Ian Schafer, who founded the full-service interactive agency Deep Focus.

That's what counts for Levchin, who claims that Slide will be even bigger than PayPal. "We have a big distribution advantage and strong metrics and have built up a tremendous amount of customer loyalty," he says.

Despite all that, turning Slide into a multibillion-dollar company won't be easy, even with a half-billion-dollar head start.

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J.P. Morgan Quintuples Bid to Seal Bear Deal

J.P. Morgan Chase & Co. chief James Dimon saved his bank's troubled shotgun marriage to Bear Stearns Cos. by quintupling his bid to about $10 a share, effectively admitting he misjudged how Bear Stearns shareholders and trading partners would react to the original deal.

The new bid shows that J.P. Morgan is willing to cave in order to appease shareholders, WSJ's Dennis K. Berman says.

The new bid of $1.2 billion comes close to sealing the acquisition because it gives J.P. Morgan a 39.5% stake in Bear Stearns right away, before the transaction is complete. Bear Stearns's board of directors also has pledged to vote in favor of the deal. That means Mr. Dimon needs support from only a few other shareholders to win approval, barring any legal challenge.

"The issues were mounting all week," Mr. Dimon said Monday in an interview. "We took another crack at it to get it just right."

The sweetened terms for Bear Stearns shareholders revived the debate about the federal government's role in the deal. The Federal Reserve stepped in a week ago to cover $30 billion of potential Bear Stearns losses -- a figure revised to $29 billion Monday as the Fed sought to limit its exposure and lessen any appearance of a bailout.

Officials justified the intervention by saying the financial system's stability was at risk, and Bear Stearns shareholders were taking a painful blow. Now the blow is somewhat less painful, although J.P. Morgan's new offer is still far below where Bear shares were trading two weeks ago.

Mr. Dimon, regarded as one of Wall Street's shrewdest deal makers, stepped in to buy Bear Stearns at a bargain price of $2 a share after the firm plunged into a cash crunch earlier this month and was faced with a possible bankruptcy filing.

But he ran into problems when Bear Stearns shareholders and employees bitterly protested the deal. Some employees had sunk their life savings into Bear Stearns stock, which now seemed nearly worthless. J.P. Morgan faced the prospect of losing Bear Stearns's most valued employees.

And Bear Stearns's trading partners worried that the deal would fall apart. Some of them continued to recoil from doing business with Bear Stearns last week. Under the original terms, J.P. Morgan's promise to back Bear Stearns's trading book would have disappeared if another suitor stepped forward. Although that scenario was unlikely, it contributed to concern about Bear Stearns's viability.

J.P. Morgan has "an incentive to get the deal done quickly, get the profits and get it handled," says Bill Miller, manager of Legg Mason Inc.'s Legg Mason Value Trust mutual fund, one of the biggest investors in Bear Stearns.

Mr. Dimon, 52 years old, said the initial price was fair, but he acknowledged feeling anxiety about the fierce opposition and the retreat by Bear Stearns customers, even though J.P. Morgan agreed to back trades with the investment bank.

In a phone call with Mr. Dimon on March 17, Bear Stearns Chairman James Cayne criticized the $2-a-share price even though he had voted in favor of the deal. Bear Stearns Chief Executive Alan Schwartz privately told people the company had been "mugged," someone familiar with his conversations said.

Gallows humor set in last week as emailed advertisements for T-shirts assailing the transaction made the rounds on Wall Street. One featured a bearskin rug and a caption that said, "Jamie Dimon stole my company and all I got was this lousy T-shirt."

The revised deal, which was negotiated over the weekend and announced Monday morning, values Bear Stearns at about $1.2 billion, or $10.13 a share. Bear Stearns's board of directors approved the deal Monday morning.

Seeking to lock up the deal, the two companies agreed to give J.P. Morgan a 39.5% stake in Bear Stearns through its purchase of 95 million new shares at the deal price. That dilutes stakes held by existing shareholders, including some who might continue to oppose the transaction.

'What's the Upside'

Traders felt last week, "Why would we trade with [Bear Stearns] -- what's the upside," says Eric Veiel, brokerage analyst for the mutual fund T. Rowe Price Associates, which owns about 1.4 million shares of Bear Stearns, according to figures compiled by FactSet Research Systems Inc. Now that the bid has been raised, he believes those worries are likely to die down.

The higher price undermines, at least somewhat, Treasury Secretary Henry Paulson's repeated argument that the federal government's actions didn't represent a bailout of Wall Street because Bear Stearns shareholders suffered. He said on March 17, referring to the shareholders, "I don't think any of them would think that this has been a good outcome."

On Monday, a Treasury Department spokeswoman said: "An orderly transition of Bear Stearns is in the best interest of our financial markets." She added: "The updated arrangements between Bear Stearns, J.P. Morgan and the Federal Reserve are consistent with that goal."

In hectic negotiations over the weekend, the Federal Reserve extracted slightly more favorable terms for the emergency financing it is providing to support the deal. J.P. Morgan is now agreeing to absorb the first $1 billion in losses from any of Bear Stearns's less-liquid assets, such as mortgage securities, that Bear Stearns had been unable to sell as a result of the credit crunch. The Fed, which originally had stepped in to fund $30 billion of potential Bear Stearns losses, will now be on the hook for a maximum of $29 billion.

The New York Fed hired BlackRock Financial Management Inc. to manage the $30 billion portfolio "to minimize disruption to financial markets and maximize recovery value," it said in a statement. The Fed eventually could make a profit on the assets, which are valued based on market levels, not the face value of the securities.

Shares of Bear Stearns, which had been trading above the $2 bid in the hopes of a higher offer from J.P. Morgan or another suitor, surged nearly 90% to $11.25 a share. The rally above the latest offer price likely resulted from traders racing to cover last week's bets that the stock would fall, and didn't reflect expectations for a higher bid, traders said.

J.P. Morgan's stock price also rose, gaining 1.26% to $46.55 a share. Although it is paying significantly more for Bear Stearns than it had anticipated, the deal is still expected to benefit J.P. Morgan, which covets some of Bear's businesses and its midtown Manhattan headquarters.

"The most important thing that will make [the deal] good for us isn't just the price. It's also about keeping the business and keeping the people," Mr. Dimon said on Monday.

Whether some big Bear Stearns shareholders will support the revised deal remains uncertain. Joseph Lewis, a 71-year-old British billionaire who owns more than 8% of Bear Stearns's stock, wasn't available for comment Monday. Mr. Lewis protested the original terms, and stated in a regulatory filing that he would take "whatever action" needed to protect his investment.

The Fed's actions are likely to get further scrutiny, as investors try to judge how the central bank would respond if other Wall Street firms ran into trouble -- both in the current turmoil and years down the road.

'Moral Hazard'

"We don't know whether this will change the way the Fed acts forever, or if this is a one-off" occurrence, said Alan Blinder, a Princeton University economist and former Fed vice chairman. "I'm sure the Fed would not and could not guarantee that there won't be a similar episode down the road."

But Mr. Blinder played down the impression that

the Fed's assistance to the Bear Stearns represents "moral hazard" -- in other words, that it would encourage other Wall Street firms to adopt risky behaviors.

"I don't think you are creating a moral hazard in the sense that one Wall Street firm after another is going to line up and say, 'Please do for us what you did for Bear Stearns,'" he said, noting that the $10-a-share deal is still far below what the company was worth several weeks ago.

"Restoring investor confidence now is good, but restoring investor confidence for all time is bad," said Peter Wallison, a senior fellow at the American Enterprise Institute. "We want investors to be wary. We want them to be concerned. We want them to think about the quality of the companies they are investing in. And the whole problem of moral hazard is the opposite. It makes investors really confident that they don't have to worry."

Today, Senate Banking Committee Chairman Christopher Dodd (D., Conn.) plans to invite representatives from J.P. Morgan, Bear Stearns, the Fed, and Treasury to a hearing on the deal, people familiar with the matter said. The hearing could be held as soon as next week. A spokeswoman for Sen. Dodd declined to comment.

Discussions about revising the terms of the $30 billion financing agreement began soon after the original deal was announced on March 16. The New York Fed told J.P. Morgan officials that if the firm were to change its original deal with Bear Stearns, then the Fed would also have to reopen the economics of its agreement, according to people familiar with the conversations.

By late in the week, it became clear that the deal would have to be overhauled and the two firms entered active negotiations Friday. The discussions with the two firms and the Fed continued into this past weekend, with the broad outlines of the agreement determined on Sunday. The New York Fed's lawyers and financial advisers worked throughout the night, until 4:30 a.m. Monday, to put the details in place. Mr. Dimon and New York Fed President Timothy Geithner talked at 7 a.m. Around 9 a.m., J.P. Morgan and the Fed finalized their end of the agreement. Shortly thereafter, Bear Stearns's board approved the new deal.

The New York Stock Exchange, where shares of J.P. Morgan and Bear Stearns are listed, generally requires shareholders to approve an issue of new shares that are convertible into more than 20% of a listed company. Bear Stearns and J.P. Morgan said that approval isn't necessary, citing an exception for cases where "delay...would seriously jeopardize the financial viability of the listed company."

The NYSE isn't expected to object to the J.P. Morgan accumulation of shares, according to a person familiar with the matter. Representatives of J.P. Morgan or Bear Stearns have been in contact with the exchange about the matter, this person said.

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Bush resolute in face of Iraq death toll

President vows to make sure American lives not ‘lost in vain’

The remains of Army Cpl. Christopher John-Lee West, one of the 4,000 U.S. service members killed in Iraq, are buried at Arlington National Cemetery in February.

WASHINGTON - President Bush pledged Monday to ensure “an outcome that will merit the sacrifice” of those who have died in Iraq, offering both sympathy and resolve as the U.S. death toll in the five-year war hit 4,000.

“One day, people will look back at this moment in history and say, ‘Thank God there were courageous people willing to serve because they laid the foundation for peace for generations to come,’ “ Bush said at the State Department after a two-hour briefing on U.S. diplomatic strategy around the world. “I vow so long as I am president to make sure that those lives were not lost in vain.”

The president received another two-hour briefing earlier Monday at the White House on Iraq, this one from Gen. David Petraeus, the top commander in Iraq, and Ryan Crocker, the U.S. ambassador to Iraq, via secure video hookup from Baghdad. Petraeus and Crocker are due to testify on Capitol Hill on April 8-9.

The deaths of four U.S. soldiers in a roadside bombing late Sunday in southern Baghdad pushed to 4,000 the number of American service members killed as the war enters its sixth year.

Grim milestones usually go unremarked upon by Bush. But he chose on this occasion to note the losses, albeit briefly and without taking questions from reporters.

A message for families
“On this day of reflection, I offer our deepest sympathies to their families,” the president said. “I hope their families know that citizens pray for their comfort and their strength, whether they were the first one who lost their life in Iraq or recently lost their life in Iraq.”

The White House said Bush is likely to embrace an expected recommendation from Petraeus for a halt in troop withdrawals beyond those already scheduled to be completed by July, with the expectation that reductions would resume before the president leaves office in January. Bush also is to receive a briefing on Wednesday at the Pentagon “on what actions his advisers recommend for cementing those gains and taking action that will lay the foundation for further additional troop drawdowns,” White House press secretary Dana Perino said.

Petreaus believes a so-called pause in drawdowns, lasting a month or two, is needed to assess the impact of the current round.

Perino said that Bush sees “some merit” in that idea. “I think that’s not unlikely,” she said. She said Bush is under “no deadline” to make a decision about troop levels before leaving next week for a NATO summit in Romania.

Bush himself has hinted in recent speeches that he supports Petraeus’ position. But he did not tip his hand at all during his remarks Monday.

“Our strategy going forward will be aimed at making sure that we achieve victory and therefore America becomes more secure,” he said, adding that it is important that these “young democracies survive” as the 21st century progresses.

With the war entering its sixth year, Bush has been making the argument that defeating extremists in Iraq makes it less likely that Americans will encounter enemies at home. Iraq has taken a heavy toll on his presidency, contributing to Bush’s low poll ratings.

The U.S. has about 158,000 troops in Iraq. That number is expected to drop to 140,000 by summer in drawdowns meant to erase all but about 8,000 troops from last year’s increase, widely referred to in official Washington circles as a “surge.”

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Newsweek interactive: Chronology of death Lessons in Iraq have led to medical advances at home Chaplains preserve life stories of the fallen

Perino had said earlier Monday that Bush spends time every day thinking about those who have lost their lives in battle and has “grieved for every lost American life.” Families of the fallen soldiers often tell the president that they want him to complete the mission in Iraq, she said.

“He bears the responsibility for the decisions that he made,” Perino said. “He also bears the responsibility to continue to focus on succeeding.”

Vice President Dick Cheney, in Jerusalem to push the Mideast peace process, said the 4,000th American death in Iraq may have a psychological impact on the American public.

“You regret every casualty, every loss,” he said. “The president is the one that has to make that decision to send young men and women into harm’s way. It never gets any easier.”

Pelosi: Cost of war 'is unacceptable'
House Speaker Nancy Pelosi said Americans are asking how much longer their troops must sacrifice for an Iraqi government “that is unwilling or unable to secure its own future.”

“Americans also understand that the cost of the war to our national security, military readiness and our reputation around the world is immense and that the threat to our economy — as the war in Iraq continues to take us deeper into debt — is unacceptable,” Pelosi said.

Sen. Hillary Rodham Clinton, vying for the Democratic presidential nomination, told a campaign audience in Pennsylvania that she would honor the fallen by ending the war and bringing home U.S. troops “as quickly and responsibly as possible.” Her rival for the nomination, Sen. Barack Obama, said “It is past time to end this war that should never have been waged by bringing our troops home, and finally pushing Iraq’s leaders to take responsibility for their future.”

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