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.

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