Some of the greatest fortunes of all-time have been the result of rollups.
“Commodore” Cornelius Vanderbilt consolidated the railroads; Andrew Carnegie
consolidated steel; and of course, John D. Rockefeller became the first
billionaire as a result of the consolidation of the oil industry.
And, yes, many modern-day moguls have become superrich from consolidation.
A prime example is Wayne Huizenga. Through consolidation, he built Waste
Management and Blockbuster Video. At Waste Management, he bought one hundred
companies during a nine-month period. He said it often meant eating breakfast,
lunch and dinner at three different cities on the same day.
Consolidation requires tremendous dealmaking skills. It also means having a
vision; that is, to see value when others do not.
So with valuations for Internet companies at nuclear-winter levels, isn’t it
time for consolidation? Well, there are actually signs of this already. A
recent deal is pcOrder.com .
For the past nine months, revenues were about $44.1 million, which was up from $29.6
million in the same period a year ago. Losses were $4.8 million.
Its parent company, Trilogy, thought that pcOrder.com was simply too cheap
and made a tender offer for $6.375 per share – all cash. The final purchase
price was $39.5 million. On the news, pcOrder.com surged 78 percent.
Although, it was not difficult to get approval for the deal. You see,
Trilogy already owned 62.5 percent of the outstanding common stock of
pcOrder.com. Further, pcOrder.com had cash of $69 million and short-term
investments of $8.8 million.
So are there similar opportunities? One could be
drugstore.com . As the
name implies, this is the leading online pharmacy. In the past quarter,
sales were $26.5 million, which was an 118% increase from the same period
last year. The site added about 190,000 new customers and average revenue
per customer rose from $43 to $49. But of course drugstore.com had hefty
losses: $33.3 million. Although, the company has initiated plans to
reduce operating expenses by $50 million over the next year, resulting in
about a 10% reduction in the workforce.
Interestingly enough, Amazon.com owns about 23 percent of the common stock
and Kleiner Perkins owns about 32 percent. Thus, if Amazon.com wanted to
purchase drugstore.com, it would not be difficult to get approval.
Currently, the market cap is $141.5 million and the company has $147 million
in the bank. In fact, during August, Amazon.com purchased 607,594 shares
and Howard Schultz (founder of Starbucks) purchased 405,063 shares (both
were for $4.94 per share).
Where Are the Promising Sectors?
Another recent Internet M&A deal was the purchase of
Fogdog Sports , which was
a down-and-out sports online retailer. Last quarter, the company had sales
of $5.9 million, which was up 290% from the same period last year. Losses
were $8.5 million.
But a competitor,
Global Sports , saw
opportunity and made a bid for the company, a combination of cash and stock.
Fogdog had about $42.5 million in the bank and the purchase price stands
at about $37 million. While FogDog’s stock did pop on the announcement, the
stock has since fallen back.
In other words, consolidation plays can be tricky. If you get a quick gain –
take your profits fast.
What are some sectors that are ripe for consolidation? Let s take a look:
Content: Content was king; now, it is tantamount to a lowly peasant.
Yet, the Web would be a lousy place without content.
Perhaps I’m biased, but I think there is quite a lot of value from financial
content. One of the leaders is
theStreet.com . In the
past quarter, revenues were $6.2 million, which was a 58 percent increase
from the same period a year ago. Losses were $8.9 million. The company
believes it can be cash-flow positive by the second half of 2001.
Speaking of cash, the company has $90 million in the bank and the market cap
is $90.5 million. The 52-week range is $2-5/8 – $22 and the stock now
trades at $3-3/8. The average daily volume is 177,318.
E-Consultants: With dot-coms running out of cash, e-consultants have
been feeling the pain. Critical for e-consultants will be focusing its
services towards traditional companies. But this will take time. After
all, traditional companies tend to be slow.
But on a valuation basis, the e-consulting sector does look attractive. It
would not be surprising to see big tech firms – like IBM and HP – look for
bargains.
Consider Organic .
In the past quarter, the company had $37.4 million in revenues, which was a 53 percent
increase from the same period last year and a 1 percent sequential increase.
The net loss was $4.5 million.
Dot-com exposure? The percent of revenues from dot-com companies has gone
from 25 percent (earlier this year) to 8 percent.
Organic has about $83 million in the bank account and a market cap of $241.9
million. The 52-week price range is $2 – $60 and the stock currently trade
at $2-3/4. The average daily trading volume is 130,454.
Portals: Simply put, success in the portal game is accumulating
unique visitors. And a great way to achieve this is via acquisition.
A potential target is
El Sitio , a portal for
Spanish and Portuguese speakers. In the past quarter, revenues were $7.5
million, which was up from $500,000 for the same period a year ago. The
site had 5.1 million unique users. But the net loss was $23.5 million.
On the balance sheet, there is about $103 million in cash. The market cap
is $160 million. The current stock price is $3-7/8 with a 52-week range of
$2-1/4 – $44-7/8. The average trading volume is 162,909.
