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THE DAY AHEAD: PurchasePro&#039&#039s battle, iVillage&#039&#039s acquisition, eToys&#039&#039 fate

COMMENTARY--PurchasePro and its supporters in the analyst community are doing everything they can to break the Barron's jinx.

The sell-side analysts were out in full force Monday defending PurchasePro from an unfavorable article in Barron's. The big question is whether sell-side cheering will help shares. It sure didn't on Monday as PurchasePro fell about 15 percent. PurchasePro has taken its lumps with other business-to-business (B2B) stocks.

PurchasePro provides B2B exchanges and targets small- to medium-sized businesses. The company garners revenue from subscriptions, software licensing and hosting.

There may be a good reason why analysts couldn't save PurchasePro -- much of their case revolved around "we knew this already."

"The Barron's article did not state anything that most institutional investors involved in the company do not already know," said David Garrity, an analyst with Dresdner Kleinwort. There's only one catch: Institutions own a little more than 45 percent of PurchasePro shares. That means what Barron's reported is news to more than half the shareholder base (in other words the folks trading Monday).

For a quick recap of Monday's meltdown of PurchasePro shares, it goes something like this. Barron's published a story over the weekend stating the business-to-business player can't retain two key partnerships, lacks good accounting controls and may not be worth its current price. PurchasePro officials didn't give an interview with Barron's, and the company's CEO Charles Johnson Jr. didn't return our calls either.

However, PurchasePro did fire off a press release Sunday night noting that the Barron's story was "riddled with inaccuracies and innuendo." In defending itself, the company may have just made matters worse. Barron's sticks by its story.

Why is this battle so important? Barron's has ushered in the kiss-of-death for many dot-coms. The publication has a good track record of flagging trends. It nailed Amazon.com. It highlighted how dot-coms were running out of cash. In some of those cases, a few dot-coms tried to fight back. For example, CDNow noted that it had more cash than Barron's said it did. It didn't matter.

PurchasePro doesn't want to be a dot-com has-been so didn't it mince any words defending itself against Barron's. And neither did analysts. Who should you believe? No one. This is an argument over shades of gray and the truth is somewhere in the middle.

Here's a look at the key points.

  • PurchasePro couldn't keep deals with Office Depot and Sprint, reported Barron's. That's true to a degree, but there's still some ongoing business as PurchasePro pointed out. The truth is right down the middle on this one. The Office Depot and Sprint deals did expire, which means Office Depot won't be paying PurchasePro $1 million a month any more.

    These deals haven't worked out as planned. Under the agreements with Office Depot and Sprint, PurchasePro was to offer their customers B2B services. Ideally, Office Depot and Sprint would be able to grow the base of PurchasePro's B2B network. CEO Johnson has said that PurchasePro hopes to become the AOL of B2B.

    To blame PurchasePro for the end of these deals doesn't get at the full story either. Office Depot had internal problems, and Sprint was distracted with the WorldCom merger, which was scrapped. Keep an eye on PurchasePro's other relationships though. It inked partnerships with Honeywell, which was acquired by General Electric, and with Computer Associates, which sources say may be rejiggering a deal with PurchasePro. These deals may not unravel because of PurchasePro's performance, but because partner strategies are changing.

    Also note that PurchasePro's main partnerships with Hilton and AOL have done well.

  • Where's the CFO? Barron's said PurchasePro doesn't have a CFO. That's technically inaccurate. PurchasePro doesn't have a real CFO. No offense to James Clough, the current CFO, but he's a lawyer. PurchasePro has said it's recruiting a new CFO. According to Lehman Brothers analyst Patrick Walravens, Clough "understands the business and knows the securities laws, but hasn't been a CFO at a company before."

    Other issues ...

  • iVillage's (Nasdaq: IVIL) acquisition came at just the right time for Women.com. On Monday, iVillage said it would buy cash-impaired Women.com (Nasdaq: WOMN) in a deal valued at $47 million. The deal consolidates the women's portal genre and gives iVillage a strong partnership with Hearst publishing.

    For Women.com, the deal was pure desperation. Women.com was running out of funds and sources close to the company said employees were bailing. Women.com was a frequent topic on #$#@Company.com. On the bright side, the two rivals won't have to compete for advertisers anymore.

    How will these companies fare combined? Good question. iVillage will dominate its niche, but is still losing gobs of money. Fourth-quarter sales of $18.6 million were up just 12 percent from a year ago and first-quarter sales will be $12 million to $14 million, down from analyst estimates of $19.9 million. Those projections were pre-Women.com.

  • So long eToys (Nasdaq: ETYS). The company announced its latest layoffs, disclosed it won't get more funding and is likely to get delisted by the Nasdaq.

    eToys isn't going to find a savior, but don't be surprised if a company like Walmart.com swoops in. Walmart.com acquired the content of Garden.com, another company with a good site and content that failed. Burpee Holding Co. bought the brand of Garden.com. The wild card? eToys has a heavy debt load, making it an expensive purchase. TDAIN


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