M&A Specialist Study Tracks Dot-Com Woes

In the rush to establish a niche in the Internet economy, it seems that a number of dot-com operations have backed themselves into an all-too small space. Now, the question arises as to how a company struggling to do business on the Web can either get out with its shirt still on its back or adapt its model of business to jumpstart growth.

In a survey of 238 Internet startups, merger and acquisition (M&A) facilitator Webmergers.com Inc. found that companies which once barrelled toward an IPO (initial public offering) have had to repress their optimistic visions and instead find new ways simply to stay afloat.

Some dot-coms with interesting technology can manage to find buyers or partners -- even for a floundering site, according to the report. The fate, however, of a fair number of Net startups has been bleak with 41 of the dot-coms in the study going completely out of business since January.

One of the most striking aspects of the survey's findings came from the dramatic increase in mergers and acquisitions year over year. With the planned megamerger of America Online Inc. (AOL) and Time Warner Inc. leading the way, the amount of money spent on buyouts or partnerships in the first half of this year beat 1999 figures by seven-fold, Webmergers said.

Much of the failure of purely Internet-reliant companies stems from them initially adopting the B2C (business-to-consumer) approach to electronic commerce instead of the apparently more successful B2B (business-to-business) approach, Tim Miller, president of Webmergers, said.

Most of the companies that fall into the B2C category attempted to target a specific set of consumers only to discover that the demand for products among such a fixed set of individuals just wasn't there.

At least 83 Internet companies throughout the world have withdrawn initial IPO filings or reconsidered plans to move toward an IPO, according to Webmergers research. Of this number, around 12 startups were acquired by a third-party company.

"I am surprised that some of these companies have been able to find buyers," Miller said. He believes that large brick-and-mortar corporations that might be expected to be leading potential buyers for Net startups often draw back from the somewhat successful dot-coms out of a fear of early commitment. "They have seen some of their competitors get burned by investing upfront," Miller said.

He gives the example of Buy.com's acquisition of Indianapolis, Indiana-based Telstreet.com earlier this year as one case where another dot-com took the initiative to buy a successful startup while telecommunications powerhouses shied away from the acquisition. Telstreet developed some interesting applications and services in the increasingly prominent wireless market and agreed to sell at around $US8 million. Miller feels that this relatively low sum should have inspired larger telecom providers to "jump at the opportunity." He added, however, that large corporations are often slow to move and attack situations of this kind.

For those startups still willing to make a go of it, Miller said that the most popular route for pushing a dot-com toward success is to cut back on expenses and to refocus a company's market strategy. Almost half of the companies in the study have laid off workers over the past year. Additionally, a number of the polled dot-coms have targeted advertising and marketing budgets as the first items on the expense chopping block.

While the majority of restructuring was carried out by California-based dot-coms, Webmergers research showed that these trends extend across the globe.

In particular, the numbers pointed to Western Europe and Asia-Pacific as other dot-com troublespots, with Hong Kong Net startups particularly facing financial issues.

Webmergers.com, in San Francisco California, can be reached at +1-415-564-2500 or http://www.webmergers.com/.

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