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THE DAY AHEAD: Here come the dot-com homecomings

If 1999 was the year of the dot-com spinoff, the next year or so may be the year of the dot-com homecoming.

In 1999, brick-and-mortar companies were going bonkers spinning off their Internet properties. And why not? Anything dot-com soared as soon as it hit Wall Street.

Barnes & Noble spun off Barnesandnoble.com (Nasdaq: BNBN), Donaldson, Lufkin & Jenrette launched DLJdirect (NYSE: DIR), Ziff Davis took ZDNet (NYSE: ZDZ) public, and the list goes on and on. As we exited 1999, dozens of old economy companies, including Toys R Us and the New York Times Co., were plotting dot-com spinoffs.

And then the dot-coms crashed.

Now these spinoffs don't look so hot. The Internet is being viewed as just another sales channel, and clicks and bricks are in. Content companies see themselves as integrated media firms. A host of dot-coms could be running back to their parents in reverse mergers.

ITurf's (Nasdaq: TURF) $86 million reverse merger deal with Delia's (Nasdaq: DLIA) may have kicked off this dot-com homecoming trend. To refresh your memory, Delia's, a questionable catalog retailer, brought iTurf, a questionable generation Y e-tailer, public in April 1999. Investors bought into iTurf, which promised to mix community, content and commerce together.

The e-tailer had the right buzz at the right time, priced its IPO at $22 and raised a lot of cash. Shares were trading at $3 by the time iTurf moved back in with Delia's.

The iTurf spinoff had nothing to do with fundamentals and everything to do with market sentiment. "If we had to do it again under those circumstances we would," said Stephen Kahn, Chairman of iTurf and Delia's.

Of course he would. The iTurf IPO was great for Delia's and Kahn. Shareholders didn't get much.

"The recombination completes what we consider a perfect case study of the cash distortion that occurred in 1999," wrote Lauren Cooks Levitan, in a recent research note. "While iTurf was able to take advantage of hungry capital markets to raise funds, we are concerned about possible negative long-term effects of splitting and patching together two businesses that we felt from the get-go worked better as one unit."

ITurf said the spin-off gave it the stock currency to retain people and make acquisitions, the cash to build infrastructure and the focus to grow the business.

Now that iTurf has been incubated, the tune has changed. "This deal puts all the assets in one place," said Kahn. Officials sang a happy tune -- positive cash flow in the fourth quarter, integration between retail, e-tail and catalog sales, and advertising opportunity -- but if iTurf shares didn't tank this merger wouldn't have happened.

Give Delia's and iTurf credit though -- they're ahead of the game.

In the future, we could see a host of reverse mergers along the way. In the long run, spinning off Web units doesn't make a lot of sense unless dot-coms soar. It would make absolutely no sense for The Gap to spin off TheGap.com today.

These dot-com parent-offspring mergers will occur on the public and private levels too. PetSmart (Nasdaq: PETM) could bring in PetSmart.com, which had planned to go public. Toysrus.com may never trade as an independent company.

Under the new economy's new order, you can reasonably expect Barnesandnoble.com to be folded back into Barnes & Noble. The closer the online bookstore gets to profitability the quicker Barnes & Noble will want to bring it in.

DLJdirect is another dot-com ripe to be reeled in. Online brokers these days are just brokers. The Net brokers are building branches and offering more services. The goal? To look like Schwab, a company that saw the Net as just another channel.

Go.com moved closer to becoming a full part of the Disney empire a few weeks ago. The company was dubbed the Walt Disney Internet Group. Although DIG still trades as a tracking stock, once the financials clear up, the online unit will be headed home.TDAIN


• iTurf, Delia's tout financial synergies
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