InformationWeek
Defining The Business Value Of Technology
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July 24, 2000 |
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Redefining Business:
Dot-Com Bargain Hunting
Smart buyers are finding gems among the Internet rubble
By Steven Titch
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ietzsche's view of the human condition was "that which does not kill us makes us stronger." He might have seen some parallels in the E-business climate of the moment.Online businesses are being tested as never before in their short and happy existence, with money-losing dot-coms now struggling to find operating cash as public stock markets and private venture capitalists become more choosy. The business competition, meanwhile, remains fierce.
Yet there may never have been a better time to be a robust technology-driven company. Surviving companies--whether conventional or Web-based businesses, or a blend of the two--are finding talent, technology, and customers among the ruins of others. Indeed, if the shakeout among certain online and technology businesses can be viewed as another step in a very fast business cycle, it gives the stronger companies the occasion to revisit and refine their business models.
Consider the San Francisco pet food and accessory retailer Pets.com, which this month bought assets from the failing Petstore.com in part so it could pick up Petstore.com's in-store promotional relationship with a major grocery chain.
Or look at Omni Nutraceuticals Inc., which this spring agreed to buy four Web sites, including HealthShop.com and E-nutrition, as it searches for product niches that let it compete in the online health-product industry against sector heavyweights such as Drugstore.com Inc. Klee Irwin, CEO and co-founder of Omni, says outside funding has shut down, and that's created a buyer's market in his industry. "Capital is impossible to get to fund these burn rates," Irwin says, referring to the rate at which money-losing companies use up cash.
In any emerging technology, there comes time for the Darwinian shakeout, explains Jeffrey Stewart, a mergers and acquisitions specialist who leads the corporate department of the law firm of Arnall Golden & Gregory in Atlanta. Stewart compares the current dot-com consolidation with past industry consolidations such as the U.S. auto industry when approximately 400 manufacturers ultimately collapsed into three giants. Yet there is one dramatic difference: Never have so many companies sprung up, been funded, and started consolidating in such a short time around one industry or technological change as they have around the Internet.
This presents stronger companies with the chance to emerge from the tumult with new strengths and insights to bolster their own E-businesses.
But there is a big question: If institutional investors won't buy into these companies, why should operating companies? The answer is that many of these troubled startups may not have everything they need to make it on their own as a great company, but they have some of the pieces which might be valuable to more established businesses, such as:
- Business and technical staffers, a hot commodity in the tight job market
- Intellectual capital, the intangible but precious value of a startup veteran
- Customers
- Relationships with marketing partners or vendors
- E-commerce infrastructure, including technology and business practices
- A valuable URL.
Robert Martin, an analyst with the investment bank Friedman, Billings and Ramsey, describes this as classic bargain-hunting for a weakened business. "Petstore.com was on its way out. In a few months it wouldn't exist," he says.
But buyers looking for a good deal should be cautious when approaching this market. Technology-based businesses are aware of their value, even if it's only a portion of the company. Petstore.com will receive almost 7 million shares of Pets.com, which was trading slightly above $2 after the announcement. If its assets pay off, the former Petstore.com owners will be paid for it.
"There's no fire sale going on," says Jeffrey Hooke, managing director of Hooke Associates in Tysons Corner, Va., an investment banking firm, and author of M&A: A Practical Guide to Doing the Deal (John Wiley & Sons, 1996). "The asking prices are still high, especially when selling companies are still focused on a business goal."
THE VIEW FROM SPACE.COM
Space.com Inc. executives didn't need a stock market slowdown to convince them that acquisitions could speed their growth. The space news and information site may be best known for its CEO and co-founder, former CNN Moneyline anchor Lou Dobbs. But what's less well-known is that Space.com has been buying technology-driven companies for a year to add key pieces to the business--such as an E-commerce backbone, more news content, and media access beyond the Web.
How should buying companies pick and choose among dot-com casualties? Mitchell Cannold, president of Space.com, says the assessment starts with the buying company understanding its own goals at the outset. "If there's a common denominator to our thinking, it's this: The only place to be is No. 1--the pre-eminent provider of news about space," he says. "Our intent is to take down any competitor we can't take in."
In June that philosophy led Space.com to buy Starport.com, another site for space enthusiasts. That took out a competitor, but Starport.com was also much farther along in its ability to offer E-commerce. Space.com didn't have the infrastructure or technical staff to run an around-the-clock E-business. "E-commerce was always understood to be an important part of the site, but we wanted to walk before we ran," Cannold says.
Illustration by Randy Hess
Photo of Irwin by Edward Carreon
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