Can These IPOs Drive Investors To Buy?

One started down this road more than two years ago, only to slam on the
brakes before reaching its destination. The other is shiny and new,
fresh from the IPO factory. Neither has a warranty.

They are Autobytel.com and Autoweb.com, two companies that run Web sites
offering car buyers a fighting chance against fast-talking auto
salesman. Both plan to go public in the next month – Autobytel the week
after next, and Autoweb in early April.

Today we’ll look at each model’s features and accessories, as well as
what prospective investors can expect in terms of performance. Your
mileage may vary.

Back from the shop

In January 1997, when Autobytel.com initially filed a $55.2 million IPO,
driving conditions for new public offerings seemed ideal. But only three
months later the Web-based automobile marketing service was in the
breakdown lane with a canceled IPO, as board members voted to bail out
in the face of a sudden market downturn.

Now the Irvine, Calif.-based start-up is back with a new offering of 4.5
million shares that company officials and underwriters Alex. Brown,
Lehman Brothers and PaineWebber hope will raise $82.8 million.
The Nasdaq ticker symbol will be ABTL.

Autobytel.com makes its money by signing car dealerships to
subscriptions in return for referrals from customers shopping on the
company’s Web site. The goal is a no-hassle, no-haggle transaction:
Shoppers fill out online purchase request forms describing the vehicle
they want, and these forms are sent to the appropriate dealership
nearest the customer’s home. Autobytel.com promises customers a
“competitive” dealer quote within a day.

Buyers also have the opportunity to research specific models, determine
a car’s actual cost to dealers, finance the purchase and get insurance
— all without ever leaving their desktops. Autobytel.com claims to have
generated 2.5 million purchase referrals to dealers since its May 1995,
when the service began, including 1.3 million last year alone. Many of
last year’s referrals came from repeat customers (including this one)
who enjoyed their previous experience with Autobytel.com

Unfortunately, the same can’t be said for the car dealers. Churn is
high – Autobytel.com lost 556 dealers last year alone, though it added
another 1,323. This turnover has to be reduced for Autobytel.com to
grow. Its current total of more than 2,700 dealers sounds impressive
until you realize there are some 50,000 car dealerships in the United
States.

Dealers drop out of Autobytel.com either because they don’t get enough
leads to make their subscription and monthly fees worth it, or because
they don’t want to bother with wised-up customers who have educated
themselves and aren’t about to be gouged.

Autobytel.com’s strategy is to build the dealership network by driving
traffic to its site, and it has steered itself into a nice hole doing
so. Last year the company spent $30 million on sales and marketing
alone, against revenues of $23.8 million. Meanwhile, accumulated debt
nearly doubled last year, reaching $43.3 million, compared to $23.9
million through ’97. A little bit of a money guzzler.

And on this side of the lot…

If that’s a turnoff to you, perhaps you’d be interested in Autoweb.com,
which hopes to raise $57.5 million in an IPO slated for April 7. Lead
underwriter is Credit Suisse First Boston. Autoweb’s Nasdaq symbol will
be AWEB.

The basic concept is almost identical to Autobytel.com’s: Give consumers
information so they can submit a purchase request for a specific vehicle
at a price they desire. Then the dealers in Autoweb.com’s network have
to respond in 24 hours with their best offers.

Autoweb.com, founded in 1994 and based in Santa Clara, Calif., boasts a
larger number of dealers than Autobytel.com, about 4,000 in the U.S. and
Canada. But turnover was 60% last year, and Autoweb.com has changed its
pricing model from a fixed fee to a per-referral basis in an effort to
reduce churn.

Revenues and losses also are lower — $13 million and $11.5 million
respectively in 1998, with an accumulated deficit of $17.6 million
through the year.

The auto industry is huge. A Wall Street Journal study estimates the
market for new and used vehicles tops $670 billion. Throw in insurance
and credit dollars, as well as the market for parts, repairs and
accessories, and vehicle-related spending in the U.S. tops $1 trillion.

Still, the vast majority of auto dealers are not keen on using the Web
for leads. Many don’t understand or trust it. That will change, but the
process probably will be slow and incremental.

Until then, sites such as Autobytel.com and Autoweb.com are great for
consumers. Investors, however, may want to wait to see if the value of
these models improves over time.

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