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The Right Start: A Gift for eToys?

Despite the nuclear winter for e-commerce, eToys was able to raise $100 million through a convertible stock and warrants offering. It should be enough money to allow the company to pay its bills for the next year or so. Not bad. The high on the stock was $86; now the stock is selling for $6-1/4 (the IPO was done at $20 in May 1999).

Interestingly enough, eToys may be in a great position. It still has a market capitalization of $753 million - which is pretty good for a company that lost $36.6 million last quarter. In other words, eToys may start buying troubled etailers. This will not only increase revenues, but also eliminate competition.

Several days ago, eToys purchased eParties. It was an all-stock deal and carried a cost of about $1.6 million. eToys acquired the domain name and technology (such as the personalization software). They also got the CEO, David Haddad (who will now be a VP at eToys).

What might be next on the eToys' shopping list? One possibility is The Right Start . This company was founded in 1985 and was a brick-and-mortar retailer for the child marketplace. In the past few years, the company has been transitioning to the Web by bolstering RightStart.com. In fact, RightStart.com filed for an IPO. Unfortunately, with the IPO market in the doldrums, the company had to pull the offering. In other words, a sale of the company seems like a reasonable alternative.

RightStart.com should be an attractive target. In the past quarter, the company generated $4.1 million in online sales. As for eToys, it had $23 million in sales in the past quarter.

Keep in mind that The Right Start has a market capitalization of $32 million. Assuming RightStart.com does not grow in the next year (definitely extremely conservative), the run-rate on revenues would be $16 million. So, if eToys pays two times revenues, the brick-and-mortar company would essentially be valued at zero. Of course, there is no guarantee that this will happen. But if this does happen, The Right Start shareholders should be very happy indeed.