As One IPO Bails, One Bounces Back
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Last Friday I wrote that Internet manque GreenMountain.com had delayed its planned IPO from last week to this week because investors have begun spotting and punishing phony 'Net companies.
The headline on the column was "Dot.Frauds On The Run". It should have read "Dot.Frauds In Full Retreat," for GreenMountain.com on Tuesday postponed its IPO, saying that current market conditions were unfavorable.
It's not likely conditions will ever be favorable again for companies such as GreenMountain.com, which makes money by selling electrical power, but thought it could ride the Internet IPO wave by attaching a ".com" to its name, buying some banner ads and throwing up a "green" educational Web site.
Back on March 29, when GreenMountain.com filed to go public, that wasn't a bad idea. There was a feeding frenzy for Internet IPOs. But since Internet stocks have taken a beating in the last couple of months, investors have become much more discerning about what is and what isn't a real Internet play.
Online music seller musicmaker.com filed to go public on Feb. 19, only to postpone the offering a couple of months later.
Unlike GreenMountain.com, musicmaker.com is a real Internet company. It sells regular and customizable CDs, which customers can either download or order for shipped delivery.
Trouble was, it hadn't been selling much. Revenues in 1998 were only $74,000, against a loss of $4.7 million. Worse, the company had no distribution deals with the music industry's major publishers left it with a small stable of oldies and alt-rock artists. What musicmaker.com needed more than anything was the ability to sell music by "A-list" artists.
So the company cut a deal with EMI, giving the publishing giant a 50 percent stake in musicmaker.com in exchange for an exclusive five-year license to EMI's music catalog, which includes artists on Blue Note, Capitol Records, Chrysalis, EMI Records and Virgin Records.
Now it's back with an IPO designed to raise $109 million through the sale of 8.4 million shares (Nasdaq: MMKR) at $12-$14, a considerably more ambitious offering amount than the initial $30 million set in February.
While the EMI agreement is a coup for musicmaker.com in a very fundamental way, there are enough unanswered questions to make this a premature IPO. For starters, even with its limited catalog, the company should be increasing revenue. Instead, revenue for this year's first quarter was $20,100, down from the $22,400 in Q1 '98. Meanwhile, the cost of sales in Q1 doubled, to $463,000. Not much bang for the buck there.
Secondly, EMI may have the goods in terms of its catalog, but it has been relatively slow to the Internet. Giving a 50 percent -- and essentially controlling - stake in your Web company to a giant from another industry that might not quite "get" the Internet could lead to problems. Just ask people at AltaVista.
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