Spin that Internet business off. Unlock the hidden value. Give it room to breathe.
The market loves that last idea, as Creative Computers Inc. (Nasdaq: MALL) knew when it took uBid Inc. (Nasdaq: UBID) public near the end of last year. Now Creative has decided it's time to move on, and the market is responding today: Creative shares were up almost 27 percent in mid-afternoon trading, and uBid shares had gained 4 percent.
| How does Creative Computers benefit from washing itself of uBid? |
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Considering that Creative's announcement was expected -- it had previously said it would let go of its entire uBid stake within 180 days after the latter's IPO -- it seems to be a strange case of buying on the news. You have to wonder what people see in this.
Not that I'm faulting Creative Computers for anything. No one (least of all a ZDNet employee) can reasonably blame anyone for trying to grab as many dollars as possible from Internet investors. And from a strategic point of view, setting up your online unit as a separate entity allows it more space to pursue deals, raise money, and so on.
In uBid's case, it helps because some of Creative's contracts barred the purchase of some manufacturers' products at closeout or refurbished prices. Since that happens to be how uBid gets the items for its auctions, you can see how that limitation might pose a problem. Creative also wasn't allowed to sell certain vendors' wares outside the United States, which obviously puts the kibosh on online sales. By completely severing its relationship with Creative, uBid says it will free itself of those restrictions.
(Proponents also say online spinoffs improves Net businesses' employee retention because stock options become available, but that's unproven. In any case, although I'm greedy enough to keep any options that come my way, Warren Buffett is right: cash incentives are a better form of compensation. If you really want to know why, read Berkshire Hathaway's latest shareholder letter and read the section marked "Accounting")
But even assuming the arguments for Internet spinoffs are valid, shouldn't the parent hang onto a portion of the business? If uBid truly deserves investors' wealth, why is Creative Computers unloading its entire 80 percent stake of uBid?
Filings with the U.S. Securities and Exchange Commission indicate that Creative needed to completely divest uBid to free the latter from Creative's sales restrictions, but the companies didn't have to set things up that way. Plenty of subsidiaries in many industries operate free of the restrictions that bind their parents. Besides, Creative could have stayed on purely as a majority investor, with no operating relationship whatsoever between itself and uBid.
You don't see USA Networks Inc. (Nasdaq: USAI) about to walk away from Ticketmaster Online-CitySearch; if anything, USA wants to boost its online assets, as the failed Lycos deal demonstrated. AMR Inc. (NYSE: AMR) has never shown any inclination to let go of electronic ticket seller Sabre Group Holdings Inc. (NYSE: TSG).
Those companies aren't even selling high-tech products. You'd think a computer retailer ought to maintain some kind of online presence, to protect its own turf, if nothing else.
Even more perplexing is the market's reaction. The uBid divestiture does little or nothing to improve Creative's fortunes; heck, Creative doesn't even get any more cash from the move. Yet investors somehow decided it was worth adding more 8 points to the price of a stock that already was valued at roughly 80 times estimated 1999 earnings before the uBid distribution.
But not even the world's biggest provider of capital equipment for the chip industry could drag up a technology market dragged down by Dell. With two hours left in regular trading Wednesday, the tech-heavy Nasdaq Composite Index was down 6.66 to 2551.70. The S&P 500 was up 2.48 to 1335.80, and the Dow Jones Industrial Average hung onto a gain of 8.26 to 10845.21. 22GO>