The FATB situation is somewhat a similar situation as PPOD. This analysis could be applied to FATB as well, valuation wise. Thanks to James Mitchell on the PPOD thread..
Shortcut To The Web -- Brick-and-mortars buy infrastructure, know-how as dotcomsseek shelter
Sat Apr 22 00:08:00 EDT 2000
Apr. 21, 2000 (InternetWeek - CMP via COMTEX) -- brick-and-mortar companies
looking for swift entree to e-business may find a shortcut by investing in
fledgling-even ailing-dotcoms.
European grocer Royal Ahold last week said it will pay $73 million for 51
percent of online grocer Peapod Inc., rescuing a company that had just lost its
CEO and a round of critical financing. Meanwhile, $29 billion supermarket chain
Safeway Inc. took a shortcut to online sales by putting up $30 million for half
of GroceryWorks.com.
It's not just a grocery phenomenon. If industry watchers are right, these
old/new economy couplings may be just the beginning. Many expect
brick-and-mortar companies in other industry segments to take advantage of
depressed dotcom valuations to grab cheap and speedy access to technology
expertise and infrastructure, fulfillment networks and other specialized
knowledge built upon a pure Internet strategy.
The result may be more hybrid companies with the customer base of an established
brick-and-mortar as well as the technology and direct-to-consumer know-how of a
dotcom. "There's a realization in the marketplace now that the true winners in
this thing are going to be brick-and-clicks or click-and-mortars," said Mark
Larson, national partner in charge of retail for KPMG.
Most traditional companies have chosen to develop an online sales capacity on
their own, mostly because sky-high stock valuations had made buying dotcom
companies impractical. Ahold, for instance, had been planning to create its own
online grocery network in the United States before the Peapod deal materialized.
"We certainly felt that we wanted to develop the technology ourselves, " said
Hans Gobes, a senior vice president at Ahold. "We didn't feel that the prices of
dotcoms were right."
But when Peapod's stock price hit an all-time low in early March, ripping $140
million from its $200 million market value, the dotcom suddenly was a
bargain-and a one-click entry into regional markets that might have taken Ahold
years to penetrate. Peapod was also running out of cash, making the company all
the more willing to strike a deal favorable to Ahold.
Ahold, whose assets include Stop & Shop and other U.S. supermarket chains, had
its eye on three prime Peapod assets: "The technology, the know-how and the
experience in home delivery," Gobes said.
Whether other established retailers follow Ahold's lead depends largely on the
stock market, said Greg Kyle, president of Pegasus Research International, which
recently reported that about one- quarter of 207 Internet businesses studied
would burn through their available cash by next March. Dotcoms pegged as closest
to the brink included music retailer CDNow, health care content providers
drkoop.com and Medscape, consumer research site Infonautics, software retailer
Intraware and Peapod.
Some retailers were already subscribing to the "buy rather than build" theory
even before the stock market slump. Last July, for example, toy retailer KB Toys
bought Brainplay.com to form its online sales unit. And drugstore chain CVS last
May snapped up privately held Soma.com for $30 million.
CVS estimates that it would have taken $30 million to develop a Web
infrastructure and strategy itself. "And self-development would have taken a
year or more," a CVS spokesman said. "The year of lead time would have been just
sitting down and coming up with an offering. It really allowed us to hit the
ground running."
Soma wasn't a public company and wasn't struggling financially when CVS bought
it, the spokesman said. That might be different if Soma were still an
independent company.
Increasingly, investors are diverting their money from dotcoms to less volatile
stocks and other securities. And that mind-set is trickling down to the early
stages of start-up fundraising.
Steve Piaker, a principal with Conning Capital Partners, an equity investment
firm, said venture capitalists are a lot more skeptical of dotcom business plans
these days, making cash harder to come by. Piaker predicted that, given the
scarcer capital and depressed stock prices, more old-line firms would take
stakes in dotcoms.
"The start-ups are going to have to find other sources of cash, and many of them
may end up in the arms of a Royal Ahold," he said.
Reasons To Buy
To start its own U.S. online operation from scratch, Ahold would likely have
spent more money over a longer period of time than it accomplished with its
majority stake in Peapod.
Jacob Jensen, a consumer goods and e-commerce analyst at Roland Berger &
Partners, a management consulting firm, estimated that Ahold would have to spend
$80 per head to acquire the 130,000 customers that Peapod has, for a total of
$10.4 million. Then to copy Peapod's 24 fulfillment centers, Ahold would need to
spend another $37 million, Jensen said.
If Ahold wanted to create an IT infrastructure to support a Web presence in,
say, 20 major markets, it could spend as much as $25 million, said Jensen, who
cited a recent IT expansion expenditure by Web grocer Shoplink.com. Then throw
in another $4,300 per head (the average recruitment cost, according to human
resources firm Saratoga Institute) to hire 1,000 employees-the number Peapod has
now-and the topline tally for Ahold could have bloomed to $76.7 million, though
the company might have defrayed some of those costs by leveraging its existing
U.S. supermarket chains.
Millions more dollars could be spent on building relationships and the overall
"learning" process, he said. For example, there's no guarantee that a fresh
Ahold-backed start-up would have targeted the right customers or learned quickly
how to run dedicated fulfillment centers, he said. "There is a hell of a lot of
work in there, just in learning," Jensen said.
Brick-and-mortar companies would be wise to seize this window of opportunity
before it closes and dotcom stocks rebound, analysts said.
"I figure we'll see more of it, whether it's direct investment from a financing
standpoint or strategic alliances," said Barry Stouffer, an analyst at
investment firm J.C. Bradford & Co. "If traditional retailers don't adapt an
Internet strategy, they run the risk of losing market share."
Piaker positions old-line companies on the offensive, asserting that they stand
to benefit the most from the next wave of Internet development.
"If you're buying or partnering with the right dotcom," he said, "No. 1, you are
getting a technology platform that can accelerate your business. Two, many of
the dotcoms already have attractive relationships to distribute their products.
Three, the old-line firms are getting a stake or ownership in a company that
probably operates at a different pace and with different incentives."
Those advantages may be enough to inspire traditional businesses to plant their
flag in dotcoms-and for the dotcoms to acquiesce.
---
One-Click INfrastructure
Royal Ahold's $73 million investment in Peapod makes it an instant online
player. Building the same infrastructure would take longer and cost more:
24 fulfillment centers $37 million
Web site development and infrastructure $25 million
Acquiring 130,000 customers $10.4 million
Recruiting 1,000 employees $4.3 million
Total $76.7 million
Sources: Peapod, analyst estimates
internetwk.com |
