Depressed valuations make some Net firms attractive

After years of watching the Net start-ups get all the attention and Wall Street money, the tables may be turning for so-called old-economy companies.

With valuations of many e-commerce companies languishing near all-time lows and initial public offering riches becoming distant dreams for many privately held firms, brick-and-mortar companies are poised to pick through the wreckage to boost their own Internet plans. Investments would allow traditional businesses, which typically enjoy large cash reserves and steady market valuations, to quickly get a foothold in the e-commerce arena for a fraction of what it would have cost last year.

In the days following the Nasdaq composite index's historic plunge April 14, several such pacts have been unveiled. Of course, the deals had likely been in the works for months, but the date serves as a starting gun for what some analysts say will be a flurry of alliances and investments between old- and new-economy companies in the next several months.

"We're at a point where the e-tailers are obviously getting down, and the traditional, old-world companies are taking a look at some companies out there," said Jeetil Patel, financial analyst at Deutsche Bank Alex Brown in San Francisco.

"If you're Best Buy, you're sitting there saying, 'Should we pick off one of these players?'" Patel said. "You wouldn't do it today; the market's not going anywhere. But you'll probably find some good deals several months from now."

The benefits are obvious: Retailers and other established companies that have been struggled to establish a significant Web presence can get access to customers, online expertise and branding for pennies on the dollar. Public and privately held Net companies that are running out of cash from investors can get much-needed infusions but must give up significant pieces of their companies. Some examples:

• Estee Lauder was among the first old-economy stalwarts to buy a new-economy nemesis. The New York-based cosmetics giant said April 12 that it was acquiring privately held Gloss.com. Under the deal, Gloss.com will be folded into ELC Online, Estee Lauder's Internet division. Terms of the deal were not disclosed.

• Royal Ahold, a Dutch company, unveiled April 14 a $73 million investment in cash-strapped Peapod of Skokie, Ill., for a 51 percent controlling stake.

• Pleasanton, Calif.-based Safeway announced April 17 that it had invested $30 million in privately held GroceryWorks.com in exchange for a 50 percent stake in the company.

Such deals would have been illogical, if not impossible, for much of 1999

Bargain bin? The share prices and market capitalizations of numerous Net companies have been slashed in recent months.
Company	Current market value ($million)	% change from 52-week high
Autobytel.com	$112	-80
Autoweb.com	86	-87
Beyond.com	79	-94
CDNow	110	-85
E*Trade	5,500	-68
E-Loan	250	-92
Egghead.com	172	-83
eToys	844	-92
InsWeb	95	-94
Musicmaker.com	72	-92
Peapod	59	-80
Stamps.com	593	-85
Value America	91	-95

and 1998, when Wall Street was infatuated with all things dot-com. Newly public start-ups often topped established retailers in terms of market valuation.

But valuations for Internet companies have been falling steadily since late last year, a slide that was punctuated with the Nasdaq's April disaster. Among the hardest hit e-tailers: grocers, pet suppliers, toy sellers and music sites.

"I think there is a great possibility of offline retailers buying online retailers because their multiples are suddenly trading at better levels than their online counterparts," said Paul Joachim, a principal with investment bank Broadview International.

Stewart Francis, head of the global technology group for Lehman Brothers, agreed. A drop in valuations may make Internet target companies more attractive to old-economy companies that previously were aghast at paying such high valuations, he said.

Such acquisitions and investments are more likely to come to business-to-consumer Internet companies than to business-to-business Internet companies, he noted.

"From the (business-to-consumer) standpoint, the online world got to the consumer quickly with their attractive Web sites and service propositions. They were way ahead of the offline world, who thought they could get there just as fast with their great brand," Francis said. "In the B2B market, offline companies were quick to embrace working with B2B companies."

Many traditional retailers that have swooped to acquire online companies say stock market valuations were not a primary motivator in shaping deals. Although timing was fortunate, they say strategic fit was the most important consideration.

For example, San Francisco-based Charles Schwab paid $10 million for two classes of warrants in online mortgage broker E-Loan on April 25, convertible into 13.1 million E-Loan shares. The first class of 6.5 million warrants has a three-year term and is exercisable at a strike price of $3.75 per share, while the second class consists of 6.6 million shares, has a 3.25-year term and is exercisable at $15 a share.

In December, E-Loan was trading as high as $30 per share, which makes Schwab's deal seem particularly well timed.

Schwab spokesman Greg Gable agreed that timing was favorable, but he emphasized that the company had been searching for an online mortgage partner for months--well before the Nasdaq crash that sapped Dublin, Calif.-based E-Loan and other companies of market capitalization.

"We don't as a rule make investments opportunistically," Gable said. "We're pretty careful about how we do investments, mergers and acquisitions. They're always very strategic...E-Loan matched very well with the kind of servicing our customers would be interested in. We wanted to make it available to our customers, and at the particular time, E-Loan was looking for investors."

Other acquiring companies were more blunt. Ahold spokesman Jan Hol said Peapod's sizable valuation drop was a major consideration in Ahold's purchase--though the online grocer is also a strategic fit for the Dutch company.

Peapod already was trading at half its IPO price when the markets began their mid-March slide. Its shares plummeted 70 percent in the following days, as its CEO resigned and the company lost a $120 million investment.

"It can't be denied that valuations for Peapod have decreased sharply over the past month," Hol said.

Safeway spokeswoman Debra Lambert said the declining valuations for the online grocery sector had no bearing on the timing of its investment in GroceryWorks.

The company had been considering an online service for a year and was exploring whether to build an in-house operation or take an investment stake in an online grocer, Lambert said.

Wall Street analysts speculate that other Internet sectors may be ripe for investments and acquisitions. Jeff Runnfeldt, online finance analyst at Dain Rauscher Wessels, said the recent stock market tumble has made small online financial companies seem "more digestible" to traditional banks on acquisition binges.

In particular, he said, several of the large banks that scrapped credit card departments recently may consider NextCard. The company, which pioneered online approval for Visa cards in December 1997, went public in May 1999 and raised $130 million. The stock, which exceeded $50 per share in November, is now trading around $9.50.

"It's come down to the level where someone could pull that off, and it would make sense," Runnfeldt said. "NextCard has a significant amount of technology, distribution agreements and a rapidly growing customer base--things there that could be tremendously valuable."

Even though many Net companies have plunged in value, would-be saviors may hold out until the market becomes less volatile.

"People are waiting for the dust to settle and looking for stability in the markets," said Seth Ferguson, managing director and co-head of mergers and acquisitions for Robertson Stephens. "The buying power of the larger companies is increasing. Some of them have seen only a 10 percent decline in valuation, while some of the smaller companies they are looking to buy may have dropped 50 to 80 percent."