Purchasing Profits
By Jahanzeb Naseer -- ABN AMRO
March 5, 2001
HONG KONG -- To the question "will there be any Internet companies in two years time?" -- asked by a leading commerce publication in an interview with Asian Internet analysts in early 2000 -- the overwhelming answer was "no." Well, we guess that is one prediction made by Internet analysts which appears to be coming true. Admittedly, the analysts in that survey were referring to the trend of all businesses using the Internet as a channel of distribution, service or acquisition and hence blurring the distinction between e-businesses and just-businesses. While the distinction has indeed been blurred, it is more as a result of Internet companies branching into offline businesses -- either organically like Amazon or through acquisitions like Tom.com and PCCW -- than the other way around.
The stock market reaction to such moves, however, has taken a U-turn over the past year -- from brutally punishing (AOL-Time Warner deal) to mildly rewarding (Tom.com's acquisitions). With management at Internet companies desperate to breathe life into flat-lining share prices, we can be assured that the trickle of online/offline mergers is about to become a torrent. This will be especially true in Asia, where the online ad and e-commerce pie is just not big enough to feed all the players who are grappling for a share. We estimate the Asia ex-Japan online ad market to be only around US$120 million for 2000, compared with about US$9 billion for the US.
As investors hunt for the next acquisition target, the attention once again focuses on cash. Companies like Tom.com and Chinadotcom, whose balance sheets provide them with the ability to "purchase profitability," are likely to start separating from the pack. Chinadotcom's share price has been languishing around historic lows and we estimate that the company is now trading below cash. The current valuations obviously assume that without a clear path to profitability, it will burn through much of the cash on the balance sheet, and hence deserves to trade at or even below its cash levels. If the company uses its estimated US$400 million cash to pull together some strategic acquisitions that stomp out the cash burn, a decent re-rating could be on the cards.
gorillasia.com |
