Mark, please come and join me on my .com bonanza until the end of this year.
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Here comes more Net IPO hype
RealNames and its ?Internet keyword? concept
is little more than a marketing gimmick
OPINION
By Christopher Byron
MSNBC CONTRIBUTOR
Oct. 13 ? Look, hasn?t this really gone far enough? At what point will Wall Street investment firms that should ? and in fact clearly do ? know better, stop selling damaged Internet IPO goods to the public under the phony-baloney claim that they?re marketing investment opportunities in the New Paradigm? Such thoughts arise in connection with a new IPO now on the runway from the folks at Morgan Stanley Dean Witter. The offering in question? Roughly $80 million worth of stock in a San Carlos, Calif., Web outfit going by the name of RealNames Corp
WE?LL GET MORE deeply in a minute into precisely what it is that RealNames Corp. actually does. For now it?s enough to know that RealNames Corp. really doesn?t do a whole lot of anything except perhaps to rent out the results of keyword searches on the Internet.
First, let?s remind ourselves how easy it is to be deluded in a bull market into thinking that stocks will go up forever simply because they go up for a while. It?s a lesson worth recalling because, if past history is any guide, RealNames Corp. could make a big initial splash when it comes to market.
That has certainly been the pattern of Internet IPOs for more than three years now, as an unending parade of high risk, long shot offerings have been marched onstage by self-consciously serious-minded investment firms like Goldman, Sachs & Co., Morgan Stanley and Donaldson Lufkin & Jenrette.
The vast majority of the companies Wall Street has been bringing public have no chance ? none whatsoever ? of ever becoming self-sustaining business operations.
The people who work at these firms aren?t dummies. They know as well as anyone that the vast majority of the companies they?ve been bringing public have no chance ? none whatsoever ? of ever becoming self-sustaining business operations. They know as well as anyone that even a modest rise in interest rates, if it doesn?t end quickly, will spell doom for many of these outfits.
But the general ? and totally predictable ? attitude seems to have been, So what! So long as we put one of those lawyerly ?High Risk? warnings on the front cover of the offering statement, and you?re dumb enough to go ahead and buy it anyway, well, hey, can?t you read plain English?
Until recently investors haven?t been hurt ? really badly hurt, that is ? by ignoring those warnings, so there hasn?t been much complaining from consumers? and for that, Wall Street can thank the super-accommodative monetary policy of the Federal Reserve for letting the investment firms get away with what they did. Now, of course, it looks like the jig is up.
Between the spring of 1996, when internet IPO fever really began, and October of 1998 when it entered what now looks to have been the start of its final and climactic blowout phase, interest rates fell by nearly a third as the Federal Reserve pursued the most expansive monetary policy of the last 40 years.
Adjust the Fed?s monetary growth rate for inflation, and you will not find a single period in post-war American history ? not even during the inflation-cursed 1970s ? when the Fed was cranking out more money, over and above the demands of the economy, than between 1996 and the end of 1998.
It was that excess liquidity ? and nothing else ? that fueled the super-boom in the stock market, sending the Dow industrials upward in a double-your-money spiral in barely 30 months? time, even as it brought underwriters rushing to market with an unending stampede of Internet dreck.
REALITY SETS IN
Now, the Fed has grown worried about the inflationary genie it may have let escape from the bottle, and since mid-summer Mr. Greenspan has cut monetary growth in half ? to not much more than the growth of consumer prices ? while nudging interest rates up by roughly a fifth.
The result has been nuclear meltdown in the land of the New Paradigm, as investors have suddenly and shockingly waked up to what should have been obvious to them all along: that in a world of rising interest rates and slowing economic growth, any company that can?t generate its own growth capital from retained earnings is ultimately doomed.
That is why, since mid-July, the Dow industrials have fallen by 7 percent whereas a fundamentally worthless stock like iVillage.com has lost nearly 42 percent of its value. There are literally dozens of other Internet stocks that have been similarly slaughtered. Looked at theStreet.com lately? The stock closed at $60 on its opening day back in May. Today it is selling for $20. Or try Salon.com. At $4.75, it?s down by 62 percent since July. There are just so many more in similar straits. So many.
LIVING ON BORROWED TIME
And so many more that are plainly living on borrowed time. Best example of the latter? Consider Amazon.com.
A year ago this stock was selling for the split-adjusted equivalent of $15 per share. Since then it?s revenues have grown by 170 percent but its operating costs have climbed by 174 percent, its marketing costs have risen by 219 percent, its product development costs have climbed by 277 percent, its interest costs have climbed by 278 percent, and its administrative costs have soared by 383 percent. Meanwhile, Amazon?s negative cash flow from operations has surged by more than 600 percent, to an annual total that now approaches $100 million in cash out the door.
The trend in the company?s balance sheet is, simply stated, horrific. A year ago Amazon.com had $332 million of long-term debt on its balance sheet. Today its long-term debt load is more than $1.4 billion. That?s a huge growth in any company?s debt ? let alone a company that can only meet its interest payments by borrowing yet more money. Take goodwill out of the picture, and the company has no book value at all. Nearly $1.5 billion in debt, and no tangible book value at all? Unbelievable! Simply unbelievable!
Right now, Amazon.com?s stock is being held aloft on hopes that the company?s plans to turn its Web site into a kind of virtual shopping mall will save its bacon. But this is desperation stuff.
The reality of the situation is that literally every financial number Amazon.com has to show the world is moving rapidly and relentlessly in the wrong direction ? and though Wall Street?s consensus forecast is for the losses to begin to slow sometime next year, the same analysts a year ago were predicting less than one-third the red ink for Amazon this year as is now shaping up as 1999 draws to a close.
ENTER REALNAMES CORP.
Nonetheless, the Wall Street IPO sausage grinder keeps cranking out the offal ? the latest example of which is RealNames Corp.
Alta Vista is one "RealNames-enabled" search engine.
Now, I may not be the smartest guy on the block, but I?m not the dumbest either. And in 30 years of covering Wall Street I can say with some confidence that I have never before seen a situation in which a company has sought to raise $80 million from the public capital market on a flimsier, more preposterous business plan than that of RealNames.
The company?s claim to fame? That it has a certain valuable expertise in coming up with names for companies ? then renting them out for $100 a year.
I kid you not. Simplified only a little bit, that?s what RealNames Corp. claims it does ? it comes up with names for Internet companies, then rents them out at $100 per year.
RealNames? business is based on the theory that operators of Web sites would get a lot more traffic to their sites if people just didn?t have to type in those annoying ?www?s at the beginning of domain names, and the ?dot.com?s at the end, in order to get where they wanted to go.
So, what RealNames Corp. has done is come up with something it calls the ?Internet keyword? concept to make everything easier. The IPO registration statement offers the following example: Say you?re looking to buy a new car and you want to learn all about Honda Accords. To get to the Honda Accord home page by simply using your browser, you?d have to go to the browser?s address window and type in ?WWW.HONDA2000.COM/MODELS/ ACCORD_SEDAN/INDEX.HTML.? And, suggests the IPO registration statement, how are you going to remember all that?
But, says the IPO, the ?Internet keyword? concept means you won?t have to remember anything. All you?ll have to do is go to a ?RealNames enabled? search engine, and simply type in the words ?Honda Accord? and voila, you?ll be instantly transported to the Honda Accord home page.
That?s what the IPO registration statement says. Honest? and just like that, too.
To which one is tempted to respond, while trying not to become overly incensed at the insult to one?s intelligence that this all represents, Hey guys, like, uh, we can do that right now ? and we don?t need any ?Internet keyword? hoo-haa to make it happen either. Just go to any ordinary, plain vanilla, non-internet-keyword-enabled search engine ? Yahoo, for instance ? and type in Honda Accord, and you get exactly what you?re looking for.
JUST A MARKETING GIMMICK?
The truth of the matter is, the ?Internet keyword? concept isn?t something to make it easier for Web surfers to locate whatever they?re looking for on the Net ? it?s a gimmick to help marketing companies jump to the top of any search list ? as well as to enable RealNames Corp. to shoehorn its way in between the search engines and their customers.
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What RealNames has done is sell its service to various Web site operators, who register to become ?RealName enabled? companies, and to various search engine companies as well. Thus, for example, if you go to the Infoseek.com Web site and search for ?Honda Accord,? the first thing that comes up on the resulting list is the link ?Honda Accord? with the tiny little initials ?RN? next to it to indicate that it?s RealName-enabled. If you then click on the link, you?ll go to the Honda Accord homepage. But if you type Honda.com into either Yahoo or Lycos ? neither of which are ?RealNames-enabled? ? you get to more or less the same place.
At least one Web site operator ? Stephen Boal, who runs a Web-based supermarket coupon service under the name Valuepass.com ? says he wishes he?d never gotten involved with the RealNames bunch at all.
Boal says he signed up back in July to have his Web site registered with RealNames ? for $100 per year ? under the name Valuepass. But, says Boal, he recently discovered that RealNames, acting on its own, had unilaterally and without his permission registered a two-word version of his Web site?s name ? that is, ?Value [space] Pass? in the RealNames computer, then linked the registered name to an affiliate network he participates in.
Is Chris on the mark about RealNames?
Says Boal, the net effect has been that every time a search engine company like, say, Infoseek, (known as the ?Go Network?) has been sending a visitor to his site, RealNames itself has been charging Valuepass.com, through its affiliates program, $1.
Boal says RealNames officials removed the link when he complained. RealNames Corp.?s general counsel, Richard Steele, acknowledges that something like that might have happened, but says the company can?t comment one way or the other because it is in registration to sell stock to the public and is thus barred from many comments in the press.
TYPICAL HORROR STORY
Be that as it may, the offering itself is a typical Internet IPO horror story. The company didn?t even exist until November of 1996, and in all of 1997 and 1998 combined it took in total gross revenues of a mere $537,000. Simple candor would seem to have required that the company thus be described as nothing more than a development-stage operation, but the registration statement says that by the end of 1997 the company passed from development stage into full-blown operations.
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Yet the resulting numbers are so small that it is utterly impossible to draw conclusions from them about the company?s prospects one way or another. About all that can be said is that a staggering 59.4 million shares of unregistered stock, fully diluted, are already in the hands of insiders, and that if the company seeks, as would appear to be the case, to raise $80 million at, say, $12 per share, the resulting float will total less than 7 million shares ? meaning a spectacular overhang of stock available for future sale from current shareholders looking to cash out when various lockup periods expire.
If those holders do indeed start cashing out in the face of rising losses and a weakening stock price, this company could quickly find its back to the wall, since $80 million from the IPO certainly isn?t going to last very long when, at the company?s current burn-rate, $5 is flying out the door for every $1 dollar of revenue that comes in. In that environment, how will the company raise more funds?
This whole offering is really outrageous when you think about it, for here is a company that doesn?t even have any earnings or cash flow ? this is a company that, for all practical purposes, doesn?t even have any revenues. Yet here it is racing to market with an IPO to help defray the costs of a payroll that has already swelled to 137 people ? meaning, we may conservatively assume, at least $4 million a year in paychecks alone. On top of that comes 50,000 square feet of leased office space, and computers and office equipment that already total close to $4 million.
In short, a huge edifice of expenses has already been erected, with more ? much more ? on the way. Yet nothing whatsoever exists to justify any of it except, as the registration statement puts it, a ?novel, high risk, and unproven? business model.
Now obviously, there should be room in any sector of business for people who want to roll the dice on novel, unproven and high risk business concepts. But at least so far as Wall Street is concerned, that is all the Internet is turning out to be ? a huge crap shoot in which favored institutional clients get in at ultra-cheap, pre-market prices, leaving the general public to catch the falling knives in the aftermarket. Investors need to bear in mind just how risky these deals really are ? especially now that the market has turned choppy and ever-junkier deals are racing to slip through before the window slams shut. So good luck with this one ? on the available evidence, you?re going to need it.<<
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