Profitable dot-coms are getting the cold shoulder in the acquisition and merger markets because of their bankrupt brethren, said local business brokers.
They say interest in sound Internet-based firms on the open market is virtually nonexistent because potential investors and sellers view successful dot-coms as companies with poor business models.
Traditionally, the business brokerage industry puts little emphasis on trends, but as more dot-com clients dive into the market, brokers are noticing fewer firms return satisfied.
The current inability of dot-coms to merge is by no means an indication of the imminent demise of the New Economy, said Alterity Partners, a New York City-based brokerage.
Rather, this is a stagnant period in the early stages of a 20-year niche, economic cycle and the pace should pick up in the coming months.
The current stereotype is hurting all dot-coms, said John Bates, president of SpectrumBusiness.com, a Laguna Hills-based business brokerage with offices in San Diego.
SpectrumBusiness represents about “half a dozen” mainly e-commerce and e-tail firms aggressively seeking other businesses to acquire or merge with, Bates said. The brokerage has 30 total clients.
– Minority Losses Affect The Majority
“There’s a great deal of concern about the viability of the dot-com company,” he said. “It is the very few who mismanaged a windfall of capital that have ruined it for the entire industry, for awhile.”
The successful dot-coms in the market to acquire other firms are polar opposites of their contemporaries from 1999. They’re lean on employees, heavily specialized and carry little debt. But they also can’t meet the cash demands of acquirable dot-coms.
TheHealthChannel.com, a health care-related, mixed e-tail and content site based in Newport Beach, has scoured the open market for the last year in search of a firm to acquire.
The dot-com sought a firm with e-tail capabilities, an established infrastructure, a good business history and at least enough revenue to break even.
Out of a search that began with 100 firms, the HealthChannel found six and are in acquisition talks with all of them, said Tom Lonergan, COO and co-founder.
HealthChannel survived the April drubbing with initial funding through equity rather than incurring debt, unlike competitor DrKoop.com. Roughly, 40 percent of HealthChannel, a public company, is owned by institutional investors.
– Acquisitions Planned Strategically
Lonergan said finding suitable companies to acquire is part of HealthChannel’s business strategy.
“That’s one of the ways dot-coms can survive,” he said. “It’s very tough out there, but there will be solid, successful, surviving dot-com companies and we certainly hope to be one of them.”
The appearance of lackluster interest in dot-coms is really a product of venture capitalists returning to their traditional roles as nurturers for start-ups, according to two directors of Alterity Partners.
The latest round of VC funding is backed by a record amount of capital, said Sean McDevitt and Phil Harris of Alterity. They believe that capital will be used to support the struggling dot-coms VC’s invested in last year.
“A lot of investments were made at high valuations (of dot-coms) late last year and earlier this year,” Harris said. “The (VC’s) that put money to work then are spending more time with those companies to make them successful.”
But they have their work cut out for them. Statistics at Alterity show that more than 130 Internet firms have filed for bankruptcy in the United States this year. Since the first day of November, at least 20 have filed for Chapter 11 bankruptcy.
