When did companies start dreaming up $1 billion advertising/distribution contracts?
Should the Wall Street Journal's report hold true, eToys Inc. (Nasdaq: ETYS) may find itself owning Bluemountainarts.com, an Internet greeting card service. The deal revolves around a stock swap worth about $1 billion, according to the Journal. "People familiar with eToys' thinking said the company is very interested in the potential of the Blue Mountain Arts site, which could expose its other products to a broader range of customers," the article says.
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Expose its other products. In other words -- marketing. Oh, and you also get the e-mail greeting cards, which feature gems such as Mr. Spock's love poetry:
- "I love you
not for what
I want you to be
But for what you are
I loved you then
For what you were
I love you now
for what you have become
Pretty heady stuff from Leonard Nimoy. That should be worth $100 million by itself.
No, not really. No way would eToys or anyone else pay $1 billion cash for a website whose main service generates no revenue and features poems from a wooden actor (although he turned out to be a pretty good director). But stock -- that's just paper. The price goes up or down depending on the market's expression, which happens to be a frown after the Journal report, judging by today's 6 percent drop in the price of ETYS shares.
Stock works well for these transactions because it doesn't cost the acquirer anything. Unfortunately, it does cost the acquirer's shareholders; in the case of eToys, an additional $1 billion in stock dilutes the company's market cap by more than 12 percent, based on Friday's closing price. If a $1 billion Bluemountainarts.com deal happens today, someone who owns 50 shares of eToys would be out roughly $435 (the difference between 50 shares at Friday's close of 70 9/16 and 50 shares at a 12.3 percent diluted price of 61 27/32 or so) from the end of last week.
Greater product exposure makes a thin rationale for taking that kind of money from your shareholders' pockets. No doubt someone sees logic in peddling kids' wares to someone in a greeting-card-kind-of-mood, but you can build plenty of brand awareness using old-fashioned advertising. eToys had $176 million cash at the end of the June quarter, so unless it blew everything in one shot, the company should have enough to pay for a strong TV campaign that'll touch more consumers than Bluemountainarts.com ever will.
Even half a billion is too much to pay for something that bears no resemblance to a real business. Online greeting cards will never generate much revenue, let alone earnings. The service is too easy to replicate (which is why there are so many similar offerings, including ones created by companies -- AOL, Yahoo, Amazon.com -- once mentioned as possible acquirers of Bluemountainarts.com). And anyone with basic command of a word processor or (if they want to get fancy) a desktop publisher can quickly create their own cards using clip art and a copy of Bartlett's Familiar Quotations, then send them as e-mail attachments.
Some observers speculate Blue Mountain Arts, parent of the website named after it, would use the greeting card service to promote sales for its flowers and candy businesses. Whether that works -- don't count on it; one reason why people use the greeting card service is because it's free, which seems to indicate an aversion to spending money -- but whether it works or not, it won't help eToys, since only the website is for sale.
eToys executives so far have done a fine job of running their company. Let's hope they don't make a $1 billion mistake here.