another interesting read...
observer.com
Grisly Dot-Com Saga as a Reduced
Salon Faces Cold Reality
by Christopher Byron
Bloomberg News
When the history of the great dot-com investment bubble
of 1996-2000 is finally written, surely a few select
comments will be heard from some
quarter or other regarding the role that
Wall Street has played in this game.
It?s called How to Fleece the Public
and Get Away With It.
This week we?ll drop by for one of our
characteristically unwelcome visits with one of the more
vivid?and easily grasped?examples of that fleecing: the
initial public offering of Salon.com Inc., the San
Francisco-based Web zine. This desperately struggling
company perfectly encapsulates the failed promise and
doubtful future of an entire generation of I.P.O.?s in the
dot-com "content" space.
These are companies that never should have been taken
public in the first place but were dumped on the public
anyway. The senseless business theory that lured in the gullible: that
advertising alone could support "content?? marketing on the Web?this when,
in many cases, the advertising and marketing costs of the content companies
themselves were greater than the total advertising revenue collected from
others.
Worst of all, it was the I.P.O. proceeds from one company that became the
ad revenue of the next company?a kind of Wall Street- financed
merry-go-round in which dot-com startups became little more than a capital
transfer mechanism from Wall Street to Madison Avenue. It was all
dependent in the end on the continuing flow of funds from the new issue
market?a flow that was destined to end sooner or later, and now has done
just that.
The bad guys in this tale? Fee-obsessed underwriters who couldn?t say no to
seven- and eight-digit commissions, and thereupon
set the merry-go-round whirling to create a market for deals that had "crash
and burn" tattooed all over them. The stupidos they preyed upon? Anyone
who failed to read?and heed?the exculpatory warnings that came
emblazoned across every prospectus: Caution, this deal is going to blow up
in your face.
In case you might not be familiar with it, Salon.com is one of the best, most
imaginatively written "magazines?? on the Web. It routinely publishes such
writers as Camille Paglia, my colleague Joe Conason, Garrison Keillor and
many others. The trouble is?this editorially excellent content site for culture
and political commentary hasn?t been able to make a dime of profit from Day
1, and it?s hard to see how it ever will. The operation?s costs are too high,
its revenue is too low, and the demand for what it offers the public is simply
too limited.
Anyone could have seen these limitations from the moment Salon.com began
in business?which is why I wrote over a year ago that the company?s
finances were unworkable and that investing in the business would be no
different from simply throwing one?s money away.
But common sense?and simple arithmetic?didn?t stop Salon.com?s
underwriter, W.R. Hambrecht & Company, from taking the company public
in a much-watched I.P.O. exactly one year ago this week, on June 22, 1999,
at $10.50 a share. For one brief and glorious moment a few days later,
Salon.com touched an intraday high of $15.12, giving the company a market
value of $162 million, as all involved congratulated each other on their
collective financial genius ? and leaving for another day the annoying
problem of what to do when the $24.9 million in I.P.O. proceeds ran out.
And now, almost 12 months later? Well, a lot has happened. All of it was
inevitable and easily foreseen, and for Salon.com it all spells disaster. For
starters, the entire dot-com sector has crashed and shows no signs of
reviving. Meanwhile, the I.P.O. window has slammed shut, and
venture-capital fund managers have taken their phones off the hook and gone
to work in the garden (or maybe to hang themselves). And in the middle of
all this, the folks at Salon.com look to be running out of money.
In the process, the company?s stock has plunged as low as $1.25 on Jan.
16?a decline of 92 percent from its high, and down 88 percent from its
offering price. As of Jan. 19, with its stock trading around $1.30 a share,
Salon.com had a value of about $15 million, meaning that the company now
faces the threat of being delisted from the Nasdaq National Market for
failure to meet minimum tangible assets, net revenue and market-cap
standards. The way things are going, the company may soon not even qualify
for a Nasdaq SmallCap listing and could wind up being bounced to the
O.T.C. Bulletin Board market.
So it?s not surprising that, in a desperate bid to stay in business, Salon.com
announced on June 7 that it was firing 9 percent of its staff, while trimming
projected spending by 20 percent.
Considering that most of the 13 people being axed are editorial employees,
and that the high quality of its editorial content is the only thing Salon.com
has going for it, well, we need not dwell at length on the apparent business
acumen of the knuckleheads who are running the company?other than perhaps
to suggest that the shareholders would evidently have been better served if
the suits in charge had decided to let themselves go instead.
Salon.com is hardly the only dot-com now handing out pink slips. In the last
month, more than 30 different Internet operations?almost all of them in the
business of trying to deliver news, entertainment or other such "content" to
consumers?have fired at least 3,500 employees altogether. In some cases,
the people let go represented only a handful of the company?s employees; in
several cases, they?ve been everyone on the payroll, because the companies
have gone out of business.
The one thing almost all these companies have in common is the confused
"we?ll figure this out as we go along" nature of their business plans and
strategies for actually making money. Yet Wall Street financed them anyway,
and the reason is hardly mysterious: For every dollar raised in an I.P.O., the
underwriter typically gets seven to eight cents.
When Goldman, Sachs & Company raised $100 million in an I.P.O. for the
bizarre iVillage Inc. 15 months ago, $8.4 million went to Goldman and the
other underwriters before iVillage ever saw a dime. As for anyone who
bought shares at the first trade in the aftermarket (for $95.88 each) and hung
on to them since, why, those luckless souls have seen 94 percent of their
money disappear. But you?d better believe the underwriters still have their
$8.4 million.
How bad has this exploitation of the public been, really?
Well, consider the following factoid, mined from the Internet database of
Hoover?s Inc., which itself went public last July (it began trading at $24 and
now sells for around $7.50): If you bought one share, at the first trade in the
aftermarket, for every Internet I.P.O. that Goldman, Sachs has managed since
its underwriting of Yahoo Inc. in April 1996?some 60 deals in all?you?d
have done spectacularly well in less than half a dozen of them (Yahoo,
RealNetworks Inc., eBay Inc., DoubleClick Inc.), and you?d at least have
come out ahead, so far, in maybe 15 more.
As for the rest?about 40 stocks in all?you?d have done so poorly that your
entire portfolio would now be down about 8 percent. You?d have been better
off leaving the money in a coffee can in the kitchen.
Then again, if you bought into the I.P.O.?s from Goldman?the premier
underwriter in the business today?you?d be the proud owner of dozens upon
dozens of total disasters. Your stock in eToys Inc. would be worth 7 percent
of what you paid for it. So would your stock in PlanetRx.com Inc. and
InsWeb Corporation. You?d have taken a 75 percent shaving on your
Webvan Group Inc. stock, on your 1-800-FLOWERS.com Inc., on your
NetZero Inc., your Agency.com Inc., your E-Loan Inc., and on and on and on.
And if that?s how you?d have done with the best underwriter in the game,
imagine how you?d have fared with any of the rest.
As for Salon.com, the company?s latest financial filings tell it all. In the three
months ended March 31, Salon.com?s revenue was $2.6 million, which is
triple the year-earlier period?but the base is so low (barely $900,000 in the
1999 quarter) that the magnitude of the increase is almost meaningless. Far
more important is the fact that, based on the pattern of the previous quarters,
roughly 17 percent of the company?s revenue probably wasn?t cash at all but
so-called barter deals (I?ll run your ad for free if you?ll run mine on the same
basis?and we?ll both call it revenue).
Take the barter revenue out of the picture, and Salon.com?s actual cash
revenue in the quarter was probably only about $2.16 million. During the
quarter, production and editorial costs alone ($2.4 million) ate up all that
and more. If the company had done absolutely nothing else during the quarter
except turn on the lights and pay its monthly rent, payroll and utilities bills
($795,000), it would have been in an impossible hole, spending $1.48 for
every dollar of revenue.
But on top of that came another $3.56 million in advertising and marketing
costs, net of barter?the budget-busting expense that Salon.com and indeed
almost all Web companies have had to incur to promote themselves to the
consuming public. Put that into the equation, and Salon.com spent about $3
for every dollar of revenue.
Is it any wonder that, in the January-March quarter, the company?s
balance-sheet cash and investments dropped from just under $24 million to
just under $18 million? After all, the company was spending almost $9
million to take in barely $2 million in revenue.
With the company?s own underwriter, San Francisco-based W.R.
Hambrecht, now cutting its revenue estimate for the fiscal year ending next
March by 30 percent, to $14.3 million?and with at least 17 percent of the net
result likely still to be non-cash barter?Salon.com could easily end the year
with actual cash revenue below $12 million. Against that, Hambrecht
projects $33 million of cash costs, meaning a cash shortfall of $21 million.
With only $18 million of cash on hand to cover it, the company looks set to
be stone broke within five quarters?and that includes the savings from the
June 7 cuts.
To drag out the inevitable, there will doubtless be more firings and more
cutbacks, until the quality of the Salon.com editorial product is so ravaged
that no one will want to read it anymore.
So why, we may ask, was this business started in the first place? So that a
group of talented writers and commentators could perform like barking seals
for a year or two, while an obscure San Francisco underwriting shop bagged
$1.3 million in underwriting fees even as their own clients got hosed? This
is the New Paradigm? If so, you can have it. |
