E-Assets for Sale--Dirt Cheap

Failed dot-coms are finding their brands and inventories are nearly worthless

EToys Inc. (ETYS ) is having a fire sale, and almost nobody has come. The Internet retailer filed for Chapter 11 bankruptcy in March and has slowly been selling off assets. So far, the company that once was valued at $10 billion has brought in about $16 million for some of its toys, equipment, and content. It hasn't been able to sell the warehouse management system that it spent two years and $80 million to develop to ensure that 1 million toys would be under Christmas trees on time. And there have been no takers for eToys' much-heralded search engine that could pull up a list of suggested toys based on a child's age, gender, and preference for, say, Pokemon over Power Rangers. Since eToys' liquidation won't bring enough to pay off its $285 million in debts, shareholders are unlikely to get anything. Kevin Silverman, an analyst at hedge fund Madison Partners, says he is "shocked" at how little eToys is getting out of liquidation. "Obviously, the original thought of what the eToys brand was worth has changed," he says. EToys isn't the only failed Internet giant that's seeing its perceived worth get stripped to the bone. Online retailers Garden.com Inc. (GDEN ) and Pets.com Inc.--which both shut down before they had to file for bankruptcy--once commanded market capitalizations of more than $300 million each. Their assets sold for an estimated $6 million or so apiece. And bankrupt high-speed access provider NorthPoint Communications Group Inc. (NPNTQ ), which once had a market cap of $5.6 billion, was bought in March by AT&T (T ) for $135 million, even less than its book value of $146 million.

What's striking about failures in the Internet sector is how little is coming out of companies that used to be worth so much. The corporate world is loaded with examples of big players that sank into bankruptcy and reemerged for successful encores, including Continental Airlines (CAL ), Loews Cineplex Odeon (LCPFQ ), and Boston Chicken (BOSTQ ). The Net, however, is proving to be a big, black hole. Companies that once had market values of hundreds of millions, or even billions, are simply disappearing. Brand names that were built up with pricey Super Bowl ads and gaudy billboards are hitting the scrap heap. The contrast is stark: While McDonald's Corp. (MCD ) saw enough value in Boston Chicken to preserve its identity, Petsmart.com Inc. bought Pets.com's Web address but didn't want anything to do with the sock-puppet identity of Pets.com. Simply put, there's little intrinsic value in many Net brands, especially ones associated with flawed business models.

What do these early examples tell us about other dot-coms that shut their doors? If investors and entrepreneurs are hoping to reap millions from a liquidation, they're dreaming. Companies that have recently closed down, including home-delivery service Kozmo Inc. and sports entertainment site Quokka Sports Inc. (QKKA ), are likely to get little, if anything, for their assets. So far, it's mostly computers, fax machines, warehouse racks, and other tangible goods that are selling, and they typically go for little more than 30 cents on the dollar. As the pile of dot-com failures grows, a glut of this equipment is likely to drive the going rates even lower. That leaves these companies scrambling to squeeze some return out of Web addresses, content, customer lists, and tailored software packages that they developed themselves.

Good luck. Such assets, which accountants refer to as "intangible," are extraordinarily difficult to value and often impossible to sell because they have little or no use after the company dies. Worse, some valuable items, such as customer information, often can't be sold because of privacy concerns. "People thought being first to market and having a brand name would produce a return," says Hal R. Varian, dean of University of California at Berkeley's School of Information Management & Systems. "There was a certain amount of irrationality in how those factors were valued."

EToys' BabyCenter is a telling example. When eToys acquired the baby information site for $190 million in stock in 1999, BabyCenter had virtually no revenues. It was one of the most visited children's sites on the Web, and back then, traffic and visibility were good as gold in the eyes of investors. "They were saying, `Gee, this thing seems to be growing fast, and it gets a high number of hits, so let's multiply its value by 15," recalls Silverman. When eToys sold the subsidiary, just prior to its bankruptcy filing, consumer products giant Johnson & Johnson paid a mere $10 million.

Some failed dot-coms, however, are wringing some value from their domain names. Online pharmacy PlanetRX.com (PLRX ), which once had a market cap of $10.8 billion, announced its liquidation in April and is selling 26 health-related Web addresses through GreatDomains.com. Some of the names--including acne.com, depression.com, and fertility.com--have been bought by pharmaceutical companies at prices ranging from $50,000 to $250,000. If those prices hold up, the company could reap $2 million for its domain names.

The price tags on these domain names might look high, but to many of the buyers, they're bargains. Petsmart bought the name Pets.com and 59 other pet-related addresses from the e-tailer for $375,000. "We looked at the traffic and what percentage we could convert to customers based on our experience, and then we determined what we were willing to pay to convert them," says Thomas P. McGovern Jr., who runs Petsmart's site. For Petsmart, with $2 billion in revenues a year, he jokes, "$375,000 is a small rounding error in our budget."

The intangible asset that may hold the most value for the average dot-com is the customer list. But privacy advocates are going to great lengths to prevent companies from selling such information. Pets.com Chief Executive Julie L. Wainwright made her list off limits, and eToys says it won't sell its customer information, unless somebody buys the whole company. Garden.com sidestepped the controversy by selling its list on the condition that each customer would have to give the O.K. before their data were released. W. Atlee Burpee & Co., a 125-year-old garden-supply retailer, took a chance, buying the Garden.com name and customer list for $2.4 million. "Garden.com attracted young customers, which is something we've struggled to do," says Don Zeidler, Burpee's director of direct marketing, who doesn't yet have data on the percentage of customers who will release their information.

Even tangible assets are becoming more difficult to sell. NorthPoint Communications, which built a digital subscriber line network covering 57 markets, filed for bankruptcy in January and promptly went on tour, offering itself for sale to more than a dozen large telecom companies. All the potential acquirers expressed interest, but on the day the company was to be auctioned off, Mar. 21, nobody showed up. The next day, AT&T bought NorthPoint's equipment for $135 million--a third of what analysts had thought it was worth.

Furniture, computers, and fax machines aren't fetching much, either. So far, eToys has netted only $1.2 million for nearly new furniture and warehouse equipment. KB Toys picked up most of its leftover inventory for $5.4 million--25% of its original cost. "A company might buy something for $1 million one day, but if they go under the next day, it's worth bupkes," notes Patrick Byrne, CEO of Overstock.com, which resells cast-off merchandise.

One by one, the big Internet brands are falling into the bupkes pile. Because eToys has not officially declared a total liquidation, the stock of the company is still for sale, meaning someone could buy what remains of the e-tailer and reorganize it into something else. The likelihood of that happening grew dim when children's publisher Scholastic Corp. (SCHL ) walked away from its plan to bid on eToys on Mar. 26. Scholastic decided that the investment wasn't worth the expense required to weave eToys' technology into its own computer systems. It's the latest evidence that many dot-com assets are about as valuable as a Game Boy without batteries.

By Arlene Weintraub

Contributing: Lara Christianson

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