E-tailers For Sale at Bargain Price

Friday, July 21st 2000, 12:00 am
By: News On 6

SAN FRANCISCO (AP) — Online retailing is not looking all that attractive these days — unless you're shopping for businesses at fire sale prices.

With their bank accounts dwindling almost as rapidly as their stock prices, some Internet merchants are selling their companies at sharp discounts that would have been inconceivable just a year ago.

In the latest example of this emerging trend, German multimedia giant Bertelsmann AG said Thursday it will buy CDNow Inc. for $117 million — an 80 percent markdown from the music e-tailer's valuation in a February 1998 initial public offering.

``We are at the beginning stage of a significant consolidation in e-commerce,'' said Bob Kagle, general partner at Benchmark Capital, a Menlo Park, Calif. firm that has financed some of the Internet's most valuable companies, including eBay Inc. and Ariba Inc.

``We are going to see lots of opportunities for good deals while many people hide under their desks, afraid of this Internet phenomenon.''

The first wave of clearance sales includes:

— The April purchase by Charles Schwab Corp. and four other investors of a 25 percent stake in E-Loan Corp. for $40 million, a 73 percent discount from the online loan broker's June 1999 IPO.

— Last month's agreement by the Webvan Group Inc. to buy rival HomeGrocer.com Inc. in a stock swap that, as of Thursday's market close, represented a 40 percent discount from HomeGrocer's IPO less than five months ago.

— Pets.com Inc.'s purchase for just $14 million in stock last month of rival Petstore.com, which had burned through roughly $110 million of its investors' cash.

``Get used to these kind of deals,'' said Adam Sarner, an e-commerce analyst for the Gartner Group in Stamford, Conn. ``A lot of these companies are running out of money, they don't have many customers and they can't keep their employees around because their stock is falling.''

In many instances, e-tailers will just go out of business because no one wants to buy their failing companies at any price, analysts said.

The Internet is already littered with tiny e-tailers that have abruptly shut down with little notice beyond a curt announcement on their Web sites.

But other Internet merchants have built decent brands and distribution systems that at current prices look like bargains for businesses trying to expand their online presence.

``Look at what Bertelsmann is getting for $117 million. They are getting an e-commerce infrastructure, a customer base and a whole lot of employees who know how that sales system works,'' said David Cooperstein, an e-commerce analyst with Forrester Research in Cambridge, Mass.

``It would have cost the company a whole lot more than $117 million to build all that from scratch.''

On the other hand, buying CDNow for $600 million — the Fort Washington, Pa.-based company's market value at the time of its 1998 IPO — probably wouldn't have made sense for Bertelsmann or any other profitable business.

Analysts expect to see many more deals involving well-established companies snapping up e-tailing upstarts. That's because consumers seem to want to be able to choose between where they shop — in either old-fashioned store or through a cutting-edge Web site.

``You need to have a physical presence and you need to have deep pockets to succeed now on the Internet,'' Cooperstein said.

But marrying the real and virtual worlds — a model that has become known as ``clicks-and-mortar'' — isn't a surefire formula for success.

Hollywood Entertainment learned this harsh fact after buying online video merchant Reel.com for $90 million in October 1998, when e-tailers still demanded premium prices.

Not only did Hollywood Entertainment fail to buy Reel.com at a discount, supporting the unprofitable Web site became a huge financial drain for the Portland, Ore.-based company.

Reel.com lost $82 million in 1999, nearly dragging down the parent company's Hollywood Video chain of stores, which turned a $31 million profit last year.

Walt Disney Co. also flopped in its attempt to meld Toysmart.com into its merchandising machine. After paying $20 million for a majority stake in the Waltham, Mass.-based online toystore last year, Disney shut down the site in May.

Traditional businesses probably won't be the only buyers chasing Internet bargains in future months. Some investors also believe leveraged buyout specialists — well known for buying out-of-favor businesses — will be on the prowl.

``There are a lot of people out there who have been salivating over this sector for some time, just waiting for the time when they could go out and grab assets at distressed prices,'' Kagle said.