Beware the "dot com" temptation

The investing public clearly is enamored with Internet IPOs. In this market, even "mydog.com" probably could trade at double its offering price on day one, just because of the Internet designation. Later, when investors realized that this was a physical-world hound--albeit one with a savvy PR agent--with limited revenue and absolutely no earnings potential, the stock would, if behaving like other Internet issues, settle back 30 percent or so. Nevertheless, it would continue to be qualified as a high-flying success.

Companies in all segments of the economy have noted this trend. At this point, no one wants to be left behind. Enterprises in every industry from retailing to filmed entertainment to industrial supplies to plumbing fixtures are catching on and recognizing that they must have some sort of Web presence. To me, that makes a great deal of sense. Even long-established organizations are finally "getting" the fact that the Internet is not a fad, but a communications mechanism that they--along with all businesses blessed with a survival instinct--must embrace, and sooner rather than later. That's the good news.

The more complicated side of the story has to do with what we will gently call envy. Traditional businesses are looking wistfully at the multiples on Internet stocks and dreaming of bigger bankrolls. While this is not particularly startling news, some of the ramifications of the move to realize those dollars are somewhat surprising, and may not be all that positive.

I have talked to innumerable companies in recent weeks that have been anxious to form and then spin out a "dot com" business, à la CBS and CompUSA, among others. The thinking is clearly--and rationally--to unlock the value of a company's Internet businesses and let the shareholders (including those who are members of management) realize the wealth to which they are entitled.

So far, so good. That's the way the good old shareholder-owned capitalist system should work. However, there's just one problem: in three out of five cases, the companies preparing these spin-offs today are, in my opinion, spinning off their futures.

Today, the Internet is a sexy new channel, a better method of information-dissemination, and a more efficient customer communication device. Despite initial skepticism, most enterprises now are allowing the Internet to infiltrate almost all departments and all business units. At the very least, communication via email and online information-dissemination from the HR department are heavily relied-upon staples in most businesses. And that's just the point.

While many of today's "dot com" businesses are interesting side notes that easily can be separated from the whole of the enterprise, in just a few years, the Net undoubtedly will be a fully integrated critical tool of most every thriving business.

For all, spinning an Internet business out now as a separate entity likely will maximize the near-term value of the enterprise and put a bounce in the step of shareholders. But in many cases, this strategy could prove shortsighted. I suspect that spinning out the Internet distribution, intelligence, and opportunities today will leave many companies strategically disadvantaged, behind the growth curve, and locked into slow, unpleasant declines tomorrow.

Would Sears have been stronger today if it had spun off its catalog business 20 years ago? Would any company have benefited from spinning off its telesales arm into a separately owned, separately motivated entity? While every rule has exceptions, these most likely would have been losing strategies. More often that not, the integrated whole is worth more than the sum of the parts.

While some businesses clearly should be unleashed from parent businesses (Compaq/AltaVista), for others the spin-off of a new channel will prove to be a near-term win at a tremendous long-term cost.