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Land Ahoy For Hollywood Stock Exchange

It was a neat idea. But during lean times, 'neat' simply won't pay the light bills. And Hollywood Stock Exchange (HSX), a virtual exchange that allows users to swap make-believe stocks, was a stone's throw away from finding a home in the dot-com boneyard. Just days before the Santa Monica-based start-up was prepared to shutter its doors after burning through the last of the $23 million in venture financing it received late last year, HSX announced a whirlwind merger with Silicon Alley-based penny stock Predict It .

The deal has all the signs of a dramatic fall from grace. Just when armchair investors were igniting a full-blown love affair with the tech-heavy Nasdaq, HSX offered a compelling alternative to test your skills without using real dough. There was plenty of spillover since the equity markets at the time were choked with retail investors trading at home on their PCs. But since then, sexy tech stocks have cooled down; and investors have grown disinterested with real stocks, let alone fake ones.

During frothier times, NBC showed interest, taking a stake in HSX in exchange for some on-air promotion on its syndicated Access Hollywood entertainment news show and its now defunct Snap.com Web property. Striking an alliance with the entertainment giant also caused VCs to open their wallets, with The Travelers Insurance Company betting $23 million on the concept in exchange for a minority interest in HSX. By the time the new millennium rolled around, HSX was the toast of the town, while already eyeballing an IPO.

In April of this year, 18-year entertainment industry vet Andy Kaplan was named chief executive officer of HSX. Fresh off a stint as VP of Sony Pictures Entertainment, Kaplan was one of many offline media execs putting a toe in the water of a new economy start-up. Following HSX' merger, Kaplan's lucrative stock incentives won't be worth the paper they're printed on, so predictably, he's already announced plans to jump ship immediately after the deal is finalized.

The concept of trading stocks for fun based on your favorite movie stars and music videos gets old real fast without any stick-and-carrot reward like with real stocks. But more to the point, following April's Nasdaq meltdown, the prospects for a moonshot HSX IPO were out of the question. That consensus, coupled with a general tightening of the belt in the VC community, sealed HSX' fate. Out of favor + money losing = no more free lunch.

Honestly, this deal isn't half bad. I've seen plenty of upstarts with brighter prospects go belly up, so HSX should consider itself fairly lucky. Under the terms of the deal, HSX shareholders will receive a 57% stake in the combined company, while Predict It shareholders get 19%. The remaining 24% goes to a group of new investors planning to sink $10 million into the new entity. SBS Broadcasting and Citigroup Investments are among the sugar daddies. Citigroup has a history of throwing good money after bad online investments, so no surprise here.

Predict It is in the same business ballpark, founded on sports handicapping software, and cemented with its $1.5 million land-grab of Virtual Stock Exchange last summer. But this move really got done because Predict It has a pretty clean balance sheet. Despite it being a penny stock, the company has a small float and $6 million in the bank, after selling shares and warrants in July. Sure, the dot-com made a scant $100,000 in ad revenue in its latest quarter, but it only lost $2 million during that same period. And HSX investors know that a merger between the two companies presents the possibility for a decent liquidity event down the road.

In effect, Predict It has lots of synergies with HSX; but more importantly,