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Second Act Doubtful For Valueless America

For most companies, filing for Chapter 11 bankruptcy is considered a somewhat bad sign of future prospects. But not for Value America and a handful of still-delusional investors.

No, they are eagerly looking forward to better days as the company transforms itself, under court protection, from a failed e-tailer to a successful provider of e-commerce infrastructure systems for businesses striving to generate sales through the Internet.

It's the old "we've learned from our own mistakes, so now we are able to offer valuable advice and services to others" argument. While there are times when this line of reasoning (or spin control) is valid, this isn't one of them.

For starters, Value America executives seem to be on a painfully slow learning curve. Here's CEO Glenda Dorchak being quoted in last Friday's company press release announcing the bankruptcy filing:

"it has become apparent that the prospect for near term profitability of a company engaged exclusively in the retail side of the electronic commerce industry is not assured.''

While this may be a fresh insight to Value America, most of the market had grasped this reality by last summer. That's why last year's holiday shopping season was widely seen as a make-or-break test for e-tailers.

Indeed, Value America's dismal sales performance in Q4 - falling 6% to 9% below analysts' projections - led to a massive restructuring just after Christmas, resulting in the layoff of nearly half the workforce and the departure of VUSA co-founders Craig Winn and Rex Scatena.

The other reason investors shouldn't buy into Value America's latest incarnation (as an e-commerce services provider, that is, not as a bankrupt company) is that VUSA has no record of sustainable success in that arena.

As a money drain, however, the company has proven itself almost without peer, with a net loss of $143 million in 1999 and accumulated debt of $268 million through this year's first quarter. That's what happens when you launch an incredibly expensive branding campaign, operate on single-digit gross margins, and buy your co-founders a jet.

The other thing that happens is your stock falls from a first-day opening price of $69.06 in April 1999 to 72 cents per share, the amount VUSA was selling for when the Nasdaq suspended trading after Friday's market close. That's a plunge of 98.9%.

Value America may in fact have some online transactional expertise, but the company hardly is first to the e-commerce software party. Muscular competitors abound in that sector, so it's hard to see how a crippled Value America will build a customer base beyond its handful of current partners and investors such as Federal Express.

Yet there remain some believers. One poster to the Raging Bull message board on Monday morning said, "The new business model of VUSA sounds promising Could anyone say when and how trading on VUSA will resume!"

No, but when it does, I'm going long!



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