Chris Byron article from MSNBC; [A must read IMO, I dont
have a position in CYSP]
msnbc.com
THIS WEEK, we?ll plumb the literary depths of yet another Dr. Seuss tale ? The Cat in the Hat Comes Back ? for whatever insight it can offer on the turmoil now rippling through the Internet sector and, in particular, for the light that the story sheds on the struggles of an Internet retailer known as Cybershop.com Inc.
We bring up the Cybershop matter not because the numbers involved are uniquely large (they aren?t), or because the manner in which the company has gone about trying to exit from Internet retailing seems so fundamentally deceitful and manipulative.
No, we bring it up because what the folks at Cybershop did suggests how desperate the situation is now getting for many dot-com companies in the Internet space. The stunt in question ? for which the company is now being flayed by shareholder lawsuits from all directions ? gives an indication of what investors can look forward to from yet more dot-com outfits as more and more of them begin to realize what should have been obvious from the start: You simply cannot make money from consumer retailing on the Web.
Oh sure, you can play Amazon.com Inc.?s game and monkey around endlessly with your numbers so that revenues appear to be growing. But in the end, all Web retailers wind up confronting the same cruel truth: Marketing costs are too high, barriers to entry are too low, and the only way you can generate real sales growth is by selling with such razor-thin profit margins as to amount to selling at a loss ? either that, or forget about selling much of anything at all.
Cybershop
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That?s where Cybershop comes in. This six-year-old New Jersey-based Internet retailer has managed to keep its margins up by refusing to compete in the discounting game that has all but destroyed rivals ranging from Value America Inc. to Egghead.com Inc. But in so doing, the company has discovered not only that it can?t make a profit (no Web retailers have been able to make a profit) but, what?s even worse, it can barely even attract new customers. How can you make your sales grow when you and your competitors are all selling the same stuff ? and they?re selling it for less?
SELLING AT THE TOP
CyberShop.com, Inc. (CYSP)
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So, that having been said, let us zero in on a public relations trick attempted by Cybershop?s top management that began to unfold last November, and ask Cybershop?s chairman and chief executive, Mr. Jeffrey Tauber, the following rhetorical question: ?Come on, fella, did you really think you could get away with that??
We?re referring to how Mr. Tauber appears to have dealt with the collapse of his business ? by having it erupt in all directions with happy-faced press releases about how fantastically things were going ? even though he had quietly dumped roughly $7 million worth of his stock onto the market, knowing full well that, in reality, the business was a shambles.
Nor was he alone in that effort, for as it now turns out, two other top officials at the company were also dumping stock. And the folks at the General Electric Pension Trust ? the company?s largest institutional stockholder ? also had filed papers indicating plans to sell shares. Altogether, a total of nearly 1.2 million insider shares ? representing close to 13 percent of the total Cybershop shares in existence and fully 23 percent of the company?s day-to-day public float ? looked to have poured into the market in this way during the last two weeks of November, helping send Cybershop?s share price careening from a high of $14.75 on Nov. 29 to a year-end low of $5.12 four weeks later. Since then the stock has sunk even further and today trades for less than $3 per share.
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Does this sound right or fair to you? I?m sure Mr. Tauber has his lawyers cranking overtime, even as we speak, to dream up some kind of twisted rationale for why abandoning ship, while simultaneously encouraging the passengers to think nothing was amiss below the waterline, was an O.K. thing to do. But if you ask me, well, let?s just go to the videotape.
SUCCESS? OR CYBEREMBARRASSMENT?
We begin with the fact that on Feb. 1, with Cybershop?s stock in a tailspin and selling for a mere $5.06 per share, the company issued a press release proclaiming ? on the basis of unaudited financials prepared by the company itself ? that its just-completed September-December period had been the biggest and most successful quarter in the company?s history, with net revenues of approximately $4.2 million.
The people at Cybershop didn?t put out this press release because they figured it was a good way to waste everyone?s time. No, they put it out because they knew that inexperienced and na‹ve Internet investors often mistake this type of PR for actual news, and frequently buy or sell stock based on what?s in it. That?s why they released it to the public at precisely 9:22 A.M. Eastern Standard Time, which is to say just before the market opened for trading and the release stood the best chance of getting noticed, giving the stock a badly needed lift.
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It is also why the company managed to leave out the single most important fact any investor would have needed to know in order to evaluate just how fantastically things really were going, allegedly, at the company. What the release did not point out, or even hint at, was the truth behind that $4.2 million revenue number. The number wasn?t great, it was atrocious, representing a mere 23.5 percent growth in sales over the year-earlier period when rival retailers like Amazon.com and Buy.com Inc. were racking up year-over-year quarterly gains of anywhere from 167 percent for Amazon.com, to 197 percent for Buy.com.
Nine days later, on Feb. 10, the company issued another press release, which surely would have seemed utterly baffling to anyone who?d read and believed the Feb. 1 release. Reason? The Feb. 10 release announced that the company had decided ? for reasons that were apparently not worth going into ? to sell off its Internet retailing business and redeploy the proceeds into becoming what amounts to an investment holding company for Internet startups.
Now why, we may well ask, if things had apparently been going so great only nine days earlier, had the company now suddenly decided to do a complete about-face and get out of the online shopping business entirely? The answer, of course, is that the first press release was ridiculous. Contrary to its claims, the business wasn?t going great at all; in fact, it was collapsing.
So severe had the cash crunch at Cybershop gotten that without a fresh infusion of capital from somewhere, the company would have been down to no more than $4 million of cash by year?s end, and out of day-to-day working capital altogether by summer. As a result, the company was forced to sell stock, in two tranches, to two private investment groups ? in September and again in December ? raising $11 million just to stay in business.
WHO KNEW?
Now we may not be the smartest folks in town here at Eye to the Keyhole, but we didn?t fall off the turnip truck yesterday, and frankly we find it just a little hard to swallow that the two investor groups involved ? Strong River Investments and Montrose Investments L.P. ? would have simply stood there with looks of happy stupefaction cemented to their faces when Mr. Tauber turned up in November with his palm outstretched and said, ?Say, folks, remember that $5.1 million you gave me back on Sept. 30? Well, I need some more. So how about another $6 million?? What did they say in response, ?Sure, you betcha?? No, I?ll bet the conversation went more like this: ?Whadayamene? What did you do with the 5.1 million??
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Be that as it may, it seems doubtful, to say the least, that having one way or another managed to snag a second helping of loot from the two sugar daddies, Mr. Tauber would have tried his ?Oh, by the way? act yet a third time on Feb. 10. It simply asks too much for one to believe that with the ink not yet dry on the company?s happy-faced press release of Feb. 1, Mr. Tauber would have approached the two investment groups, hat-in-hand, all over again and said, ?Guess what, guys? This business is a fiasco. I think we?d better just shut it down and get into something else.?
No, there are not many things we can be sure of from a distance, but this is one of them: There is no way ? and I mean none at all ? that Cybershop?s deteriorating financials could have come as a surprise to Mr. Tauber, or his backers, or anyone else at the company probably from as far back as last September, and certainly since the end of November when Mr. Tauber dumped his stock.
The nine month financials ending Sept. 30, 1999, showed a loss from operations of almost six and a half million dollars which, when added to acquisitions of businesses, showed that the money was running out at a rate of over a million dollars a month. The only people kept in the dark about just how truly bad things were getting were the public shareholders, who were led to think that everything was going great at the company when it wasn?t.
In that regard, the final shoe dropped on Feb. 29, when the company released its 1999 full-year and fourth-quarter financials, and the numbers didn?t look anything like what the company had said they were back on Feb. 1. Instead of net revenues of $4.2 million, the company actually took in net revenues of less than $3.99 million, meaning that not only had year-over-year revenues not grown even 23 percent, but they had grown less than 17 percent. By Internet standards, that is so slow a growth rate as to amount to no growth at all.
Meanwhile, Mr. Tauber and the other insiders had already dumped millions worth of their shares when the stock was still selling as high as $14 per share, and before the world at large knew just how horrid the company?s prospects really were. Now, class-action lawyers from everywhere have discovered what he?s been up to, and no fewer than four separate class-action shareholder lawsuits have been filed against the company.
We called Cybershop for comment on all this, but wound up being directed to a perfunctory and basically meaningless press release issued by the company in response to the lawsuits. The release waved the suits away as ?meritless? and proclaimed the company determined to defend itself ?vigorously? in the actions.
FROM RETAILER TO INCUBATOR
Know what I say to that? I say, stick it where the sun don?t shine, boys; if you had a defense to make, you?d be making it. You knew your company was a mess, yet you misled the public into thinking otherwise. Meanwhile, you sold millions of dollars worth of shares into the market to enrich yourselves personally when you, and you alone, knew the bitter truth. Then you bailed out of the very business that had collapsed from under you, and you?ve now begun cranking out a whole new barrage of press releases about the great big plans you?ve got for your new-and-improved Cybershop, which, if we are to believe you, has somehow managed to morph into an ?Internet incubator.?
The CyberShop.com home page now consists of nothing more than a press release announcing the launch of an "Internet Incubator."
But what I want to know is this: Why should anyone believe anything you?ve got to say, ever again, on anything? You say you?ve inked a deal to sell your consumer electronics retailing site to two former Cybershop executives. But they won?t be paying cash, just a combination of debt and equity in some new company they?ve set up to buy the business, so why is this any kind of improvement from where your own shareholders sit? After all, if the business were worth anything, you would have kept it ? or at least sold it for real money. Instead you?ve engaged in nothing more than a mere accounting trick to get it off your books even though it hasn?t actually gone away at all.
You?re like the Dr. Seuss story about the crud, The Cat in the Hat Comes Back. Remember what happens? The cat takes a bath and leaves this filthy pink ring in the bathtub, and everything they use to try to clean it off simply spreads the filth to something else. Pretty soon it?s all over the house and the yard, covering everything, and only when they discover some secret stuff called ?voom? does the crud begin to go away.
That?s what your scheme to sell your electronics retailing fiasco is all about ? the search for some voom to make the bathtub ring go away. The trouble is, in real life there?s no voom. You?ve got the Internet equivalent of bathtub grime all over everything now, and you?ll never get it off ? anymore than Amazon.com can make its own losses disappear by acquiring more and more money-losing operations.
You say you?ve become an ?Internet incubator? to develop new startups, but that?s just more talk in the Internet sector?s search for voom. You want Wall Street to start thinking of you like some kind of CMGI Inc. (a real Internet incubator), but if you had had any good ideas you?d have done them already. What you?ve really got is $11 million (or however much is left of it) from those two investment groups who?ve been keeping you upright, and, in my opinion, all the ?Internet-incubator? talk is just so you won?t have to give it back.
Know where I come out on all this? In my personal, private and Constitutionally protected opinion, I think you guys are just a bunch of fast-talking phonies, and as far as I?m concerned, the only way to solve your problem is to go voom yourselves... you ain?t got us fooled.
You can reach me by e-mail at cbyron@optonline.net.
This column appears courtesy of The New York Observer, where it first appeared. For more of the Observer, visit its Web site at observer.com
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