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2HRS2GO: Webvan&#039s move makes sense

Webvan said Monday it will trade slightly more than $1 billion in stock for all the outstanding shares of competitor HomeGrocer.com.

While Wall Street gave an immediate thumbs-down to the deal, Webvan has cemented itself as the leader in a B2C niche that might actually pan out.

The fact that Webvan (Nasdaq: WBVN) shares fell 1 11/32, or 15 percent, to 7 3/8 while HomeGrocer.com (Nasdaq: HOMG) slid 1 3/32, or 14 percent, to 7 isn't surprising.

If anything, the slumping stock prices show investors don't have either the faith or foresight to recognize a decent move by a company determined to make a go of it despite some serious obstacles.

It's not like this acquisition is going to accelerate Webvan's burn rate. It's trading about 138 million of its cheap shares for all the outstanding shares of an equally cheap stock.

In return, it not only wipes out one competitor but will expand its reach to include 13 metropolitan areas in the U.S by year's end.

Say what you will about the B2C market, but the online grocery gig has its fans. It's just a matter of changing people's habits and getting them, one by one, to try out the service.

Everyone knew this consolidation was coming.

Credit Webvan for making a pre-emptive strike, gobbling up a competitor at a relatively inexpensive price. If you believe in the business model, as Webvan and its investors clearly do, you might as well try to get as big as possible as fast as possible just in case you're right.

There's evidence that this produce-to-your-porch novelty is catching on.

In its latest quarter, Webvan topped the Street estimate by a penny a share, losing $38.7 million, or 12 cents a share, on sales of $16.3 million.

That $16.3 million was a 79 percent jump from the year-ago quarter, not a bad growth rate for a company that's really only tapped the San Francisco Bay Area.

Contrarians will argue that simply acquiring another cash-poor company to expand its reach means Webvan will burn cash twice as fast. And it may.

But if you're going to have your hand out for help eventually, why not bring more to the table when you're begging?

Keep in mind, HomeGrocer's investors include Amazon.com (Nasdaq: AMZN) and tech venture capital firms Hummer Winblad Venture Partners and Kleiner Perkins Caufield & Byers. You can bet these guys are going to want to see Webvan make a go of it and, therefore, are going to be more inclined to prime the pump in the years ahead.

Make no mistake. The newly expanded Webvan isn't going to reach profitability any faster because of this deal. But if and when it does get to that point, it will hold a virtual stranglehold on the market.

"This merger will reduce our combined capital needs and enhance our financial strength," said CEO George Shaheen said in a statement. "It generates significant marketing and operating efficiencies."

By the end of the year, Webvan said it expects to serve markets in Atlanta, Baltimore, Bergen County, N.J., Chicago, Dallas, Los Angeles, Orange County, Calif., Portland, Oregon., Sacramento, San Diego, San Francisco, Seattle and Washington, D.C.

As more and more people realize they can get quality meat and produce delivered to their door for roughly the same price as driving to the local supermarket, Webvan will be there to capitalize.

From the very beginning, Webvan knew that profit margins would be slim. If traditional grocery stores are making millions at margins of 1 percent to 3 percent, Webvan figures it can do the same. But it needs volume.

Last quarter, Webvan said it had 87,000 active customer accounts, up 85 percent from December.

It's expecting total sales of between $150 million to $160 million in fiscal 2000. Those aren't IBM-type numbers but it's nice little start.

Assuming Webvan can get the financing it needs to keep its vans rolling for the next few years, Wall Street may look back on this deal as the turning point.