eToys IPO delivers big gains for BabyCenter

Shortly before eToys bought the site on April 19, BabyCenter was in negotiations with Amazon.com, which wanted to buy a 40 percent stake, valuing BabyCenter at $100 million. But eToys jumped in and paid 18.72 million shares for BabyCenter in a deal valued at the time at about $150 million.

Today those shares are valued at more than $900 million, following eToys' own initial public offering. After eToys announced it would buy BabyCenter, it cancelled its offering; days later, it refiled. The offering went out last week, giving BabyCenter shareholders a ninefold increase in a matter of a few weeks.

"That's nothing to cry about," said Gail Bronson, a senior analyst for IPO Monitor. Especially not for a company that for the year ended March 31 lost $4.5 million on sales of just $4.8 million, according to filings with the Securities and Exchange Commission.

"Companies are using the public markets as a means to accelerate their corporate development," said Emeric McDonald of Amerindo Investment Advisors, which manages billions of dollars for institutions and wealthy individuals. McDonald, who was negotiating for a stake in BabyCenter at the same time Amazon was, also had put the company's valuation at $100 million.

BabyCenter, Amazon.com, and eToys declined to comment for this story.

"Acquisitions are easier for public companies to do," McDonald added. Also, as the eToys-BabyCenter example illustrates, for some soon-to-be-public firms.

When eToys went public May 20, initial investors paid 20 for shares. When the stock began trading, it rocketed to 85 on the first day, then fell back to close at 76.56 that day.

In the last week, eToys' stock has drifted steadily downward, trading near midday today at 49. But even at that level, those 18.72 million shares eToys paid for BabyCenter are worth a shade more than $900 million. The eToys-BabyCenter deal is due to close by the end of June.

Bronson, also a consultant to young Silicon Valley firms, thinks more Internet start-ups may go the way of acquisition, not IPO.

"There are so many IPOs that have come out and are scheduled to go out that the boat is starting to sink under its own weight," she said "The market can only support so many 'dot.coms.' Given the annual swoon of the tech sector in the summer, Internet companies are better off staying private and building businesses that make them attractive as an acquisition or an IPO for the future."

She notes that old-line auction firm Butterfield & Butterfield dropped its already-filed IPO in favor of $260 million of eBay stock April 26. America Online and Amazon have also been in acquisitive moods lately, with Amazon buying chunks of other e-tailers or start-ups, including Drugstore.com and HomeGrocer.

Indeed BabyCenter had several considerations in the head-to-head bidding by Amazon and eToys: What's better cash and/or Amazon stock for 40 percent of your company or $150 million in eToys pre-IPO shares for all of it? When the eToys announced the BabyCenter acquisition, the expected range of eToys' IPO was 10 to 12, so BabyCenter management bet eToys would appreciate, as it did. The other option: Amazon stock, already greatly appreciated, plus what BabyCenter could raise in a future IPO of its own.

Those are calculations the public doesn't normally hear about, at least not those who don't comb the required public SEC filings of companies like eToys.

"I think we're stating to see the tide turn on the market for Internet stocks," said Bronson. "There will be a revival of the opportunity to go out and do well, but right now, there's just too many Internet stocks in play to make [an IPO] a smart move. There's no reason to be rushing over the falls with the rest of them."

Who's benefiting? Certainly BabyCenter chief executive Matt Glickman and the company's other executives are. And so are at least some of its 105 or so employees.

So will investors, including some "angels" who backed BabyCenter early. Last May, Broderbund Software, IDG Ventures, and Crystal Investment Advisors of Cleveland invested about $2 million in BabyCenter's first round of venture funding.

In October 1998, Intel, Bessemer Venture Partners, and Trinity Ventures invested about $10 million in the second venture round, as well as some of the initial investors.

For them, BabyCenter paid off big, and may continue to do so, at least until someone like Toys "R" Us and its venture capital partner Benchmark Capital, in a deal announced last month, start toying with eToys.