Shares of struggling Internet retailer buy.com Inc. got a jolt last week the likes of which they haven’t seen much of lately.
The Aliso Viejo-based company saw its shares surge 32%, jumping a whole 8 cents to 33 cents. The reason: speculation that electronics retailer Best Buy Co. could be looking to buy the online retailer.
For now, a Best Buy takeover of buy.com is just a rumor. But it does beg a question: have beaten-down dot-coms gotten to the point where they’re finally looking attractive to old-line companies or other investors?
“For some companies, the best thing that can happen is they get snapped up by somebody else,” said Jim Balderston, an analyst with Zona Research Inc., an Internet market researcher in Redwood City.
The issue is particularly relevant for buy.com and other Orange County Internet companies such as Irvine-based Autobytel.com Inc. and Costa Mesa-based Tickets.com Inc. All three have made names for themselves but are struggling to stem ongoing losses in a bid to pull through the dot-com shakeout. The companies, like other dot-coms, say they are bent on getting to profitability on their own.
In any other industry, consolidation, fire sales and even investors pursuing roll-up strategies would be in full force by now. To a small degree, that’s starting to take place in the dot-com sector: In May, Pittsfield, Mass.-based K-B Toys paid a mere $3.35 million for the assets of eToys, the now-defunct Los Angeles online toy seller.
But the dot-com sector isn’t any other industry. The rush to riches that marked the sector’s heyday also brought too many players. Loose estimates contend that 80% or more of online companies eventually could disappear.
Last month, Dell Computer Corp.’s Michael Dell said he expects more dot-coms to collapse amid fierce competition before the computer sector stabilizes.
Despite the dire predictions, venture capitalists, analysts and other industry observers are entertaining the notion of a third way for some dot-coms,consolidation.
“I welcome that kind of thing,” said Mike Feng, a partner at InveStar Capital Inc. in Irvine. “It’s more efficient and it can really strengthen the technology and business position.”
So far there hasn’t been a huge rush of brick-and-mortar companies looking to snap up Internet bargains, said Tim Miller, president of San Francisco-based Webmergers Inc., a firm that matches buyers and sellers of Internet companies and their assets. Miller said he expects that to change by year’s end, as the “fear factor” subsides and buyer stock prices quit taking beatings following Internet acquisitions.
“In the past two months,despite the carnage in Internet valuations and the lethargy in Internet mergers and acquisitions,we’ve seen two record-setting Internet acquisitions by what you could call old economy companies,” Miller said. “It could suggest that the old economy, brick-and-mortar companies are getting more active.”
Besides Best Buy, a short list of prospective buyers for buy.com is easy to come by. The most obvious is rival Amazon.com Inc. While Amazon has troubles of its own, buy.com’s customer base could pique its interest if the price were right. And then there are old-line retailers, such as Wal-Mart Stores Inc., which are looking to build up their own online operations.
“You could see buy.com fitting very nicely with an existing brick-and-mortar retailer at the right price,” Miller said.
Buy.com and Costa Mesa-based Tickets.com are “fairly valuable franchises,” according to Miller.
Tickets.com seems bent on holding its own these days, having recently secured a $15 million round of funding ($6 million of which has closed) and an additional $2 million from undisclosed investors.
The company recently got Nasdaq to continue trading its stock until July 31, at which time the company hopes a cash infusion and a planned reverse stock split will bump its stock above the buck level required by the exchange. The company, an online provider of ticketing services and software, says its goal is profitability this year.
Miller said online ticketing and Tickets.com’s revenue model are “very attractive.” The company could draw interest from a range of businesses, including a large entertainment company, a Web portal or even a publishing company.
But observers don’t have to scratch their heads for long to come up with the most obvious potential buyer: Los Angeles-based Ticketmaster, the kingpin of the ticketing industry.
Even so, industry investors are divided on whether Ticketmaster, which has come under fire from regulators for its dominant market share, is likely to swoop in.
“It would be virtually impossible for those two to merge,” contends Thomas Gephart, chairman at Ventana Global Ltd., a venture capital firm in Irvine and a major Tickets.com investor. “They would have a huge monopoly.”
Harry Lambert, managing director at InnoCal, a venture capital firm in Costa Mesa, isn’t so sure. He said he would be surprised if federal regulators raised “too much of a ruckus” if the Ticketmaster bought Tickets.com because “Ticketmaster pretty much has a monopoly now.”
“I could see good business reasons for that happening, but whether both sides would consider that a good cultural fit or not would be a major question to me,” Lambert said.
Finding a good fit seems to be the key. Companies looking to acquire others usually are after certain assets, whether it’s industry expertise, subscription lists or databases, according to Zona Research’s Balderston.
Autobytel.com has made a couple of acquisitions to build its network of subscribing car dealers and the number of people who use its site. The company runs a site for buying cars and getting information on them. Car dealers pay fees to use the site.
The company in April said it plans to buy rival Santa Clara-based Autoweb.com Inc., which also offers car information and buying services, but barely was making it. Neither company is profitable, but Autobytel has said it will be profitable by the third quarter.
Autobytel, has a network of 7,000 dealers nationwide and is projected have revenue of $100 million annually.
This is Autobytel’s second acquisition. Last year it bought CarSmart, a site that refers consumers to dealers and lets them research how to buy, sell, lease and insure a new or used vehicle.
But as Autobytel.com builds its dealer database, the company could become attractive to brick-and-mortar car retailers such as Ft. Lauderdale, Fla.-based AutoNation Inc. It also could catch the interest of Microsoft Corp. and its car research site, MSN Carpoint Inc. Carpoint has an alliance with AutoTrader, a division of Toronto-based Trader Media Corp., which connects buyers and sellers of used vehicles.
But setting deals in motion isn’t expected to come easy for dot-coms.
Zona Research’s Balderston said it’s hard for businesses to lure buyers when “you’re basically perceived as being on a burn-rate watch.”
“If you’re not profitable and just burning cash, then where’s the value?” Balderston said, adding that brick-and-mortar companies, already watching well-funded dot-coms flail, may just continue to wait to get “dime on the dollar rates.”
“A lot of these guys got in too early and spent too much,” said Patrick Keane, an analyst at Internet research firm Jupiter Media Metrix Inc. in New York. “They should have gotten in a little early, and looked at it as a marathon instead of a sprint.”
Often, the main driver behind an acquisition is getting technology more quickly than it would take to develop in-house. But trying to position a dot-com for sale based on its technology isn’t a sure bet either, analysts say.
“There haven’t been big technology buys,” Jupiter’s Keane said. “It’s been really more of depressed inventory buys. Companies will buy logistic centers, inventories, employee bases, etc.”
And, Balderston pointed out that many online companies are using technologies developed by third parties, which often “isn’t worth anything to anybody else.”
Still, he said online businesses,if they aren’t doing so already,should be identifying assets that make them valuable.
InveStar’s Feng said his firm plans to invest in new Internet companies, but is being more selective. He said he’s waiting to see “which guys make it through the tunnel.” n
