"Grim Reapers Prey On Dot-Com Failures"
By Laura Lorek, Inter@ctive Week
July 10, 2000 6:59 AM ET
Say goodbye to the all-powerful venture capitalists and dot-com millionaires and hello to bankruptcy lawyers, turn-around specialists and liquidators. They are in vogue now, and you can expect them to grace the covers of quite a few business magazines in the coming months.
As cash reserves dwindle, traditional brick-and-mortar companies, Internet opportunists and bankruptcy lawyers are starting to circle the carcasses of the dead and dying dot coms like vultures. They want any viable assets they can find, including customer lists, office furniture, domain names and excess inventories.
Since Jan. 1, 25 business-to-consumer Internet companies have closed and 25 percent of those have filed for Chapter 11 bankruptcy protection, said Rob Darefsky, a partner at PricewaterhouseCoopers' business recovery unit in Chicago.
The fallout is expected to continue to accelerate. While most of the dearly departed so far have been in the electronic retailing and content management area, more bankruptcies are expected in the business-to-business (B2B) arena as well.
Last month, Equipp.com, a San Diego-based Internet company offering a marketplace for manufacturing equipment, was forced to shut its doors because it couldn't raise additional funding, said Michael Coffin, the company's chief executive.
Investors had sunk more than $7 million into the 9-month-old company, which boasted online sales of $1 million and more than 19,000 customers. "We were shut down too soon. We simply ran out of oxygen,'' Coffin said.
A push from the SEC
As the failures continue to mount, lawyers' bankruptcy work for Internet companies may even outstrip the considerable amount of corporate work that's been done in the past few years, said David Washburn, a corporate attorney at Dallas-based Arter & Hadden.
The Securities and Exchange Commission issued tougher rules on how Internet companies can recognize revenue - and those rules caused a major drop in the stock prices of some Internet companies. The revised SEC guidelines, expected later this summer, could prompt further fallout and lead to more bankruptcy filings, Arter & Hadden said.
To prepare for the onslaught of Internet bankruptcy filings, the Dallas law firm of Munsch Hardt Kopf & Harr has added three bankruptcy attorneys in the past six months, and two years ago it opened an office in technology-rich Austin, Texas. "I'm like the undertaker to many of these companies," said Russell Munsch, one of the firms' shareholders. "They don't want to see me coming."
The firm, which specializes in restructuring, filed more than 200 bankruptcy cases following the Savings and Loan crisis, Munsch said. Lately, its business has picked up in the bankruptcy area again, but this time it's working with technology companies. "Right now, most of the dot-com, Internet-type companies are trying to work outside of the bankruptcy process, but there will be a point in time when they simply will not be able to do that,'' Munsch said.
Not all of the filings have been voluntary. In an involuntary Chapter 11 petition filed in U.S. Bankruptcy Court, creditors forced foundering Internet toy seller ToyTime.com into bankruptcy court seeking payment of trade debt. Mattel, Microsoft, Grey Advertising and others claim ToyTime owes them about $3 million in unpaid bills. ToyTime closed down in May.
Many failed Internet companies do not file for Chapter 11 reorganization because they do not have the money, or a viable business, to continue to operate, said Keith Shapiro, managing shareholder of Greenberg Traurig's bankruptcy and reorganization practice and president of the American Bankruptcy Institute. Internet companies can generate more cash for assets by working outside of bankruptcy court, he said. So, many simply close their doors and sell what they can to pay back creditors.
"One thing that is characteristic of dot-com companies is that they don't make sexy bankruptcy cases,'' Shapiro said. "Most of the dot-com companies have very little in the way of physical assets.''
Take the case of Boo.com. During its short life, the London-based company blew threw an estimated $135 million in cash at a burn rate of about $23 million per month. Shapiro handled the sale of Boo's assets in the U.S., which consisted primarily of seasonal clothing.
After going out of business, Boo made some money to pay off its creditors by selling its domain name, as well as data on its 350,000 customers, to Fashionmall.com.
To appease creditors, online casualties CraftShop.com and Toysmart.com are also trying to sell customer data that could include information such as phone and credit-card numbers, home addresses and even statistics on shopping habits.
The practice has angered some privacy watchdogs and could anger thousands of customers, who assumed the data would not be transferred. While some bankruptcy courts have allowed the data sales, federal regulators, such as the Federal Trade Commission, have voiced objections and plan to look into the practice.
Meanwhile, some companies are profiting from the failures. In fact, online auction sites for excess inventory and bankruptcy assets are, ironically, one of the fastest growing B2B plays on the Web. Forrester Research expects the market to reach $52.6 billion by 2002.
Bid4Assets.com, an online marketplace for buying and selling high-value, distressed assets from financial, government and bankruptcy sources, has more than $1 billion worth of assets for auction, said Tom Kohn, the company's CEO.
The Silver Spring, Md.-based company is dealing with more Internet companies these days, Kohn said. Recently, it helped the estate of a Massachusetts-based technology company sell its intellectual property, including the domain name "planetrock.com'' for $28,000.
Activity to liquidate Internet companies began to pick up after Christmas, said Brian Yellen at Great American Group, a 28-year-old company that sells off physical assets of bankrupt companies nationwide.
The shakeout in the Internet is not all bad, notes Jonathan Cohen, director of Internet research at Wit SoundView. "The recent wave of Internet bankruptcies and failures have gotten a lot of press, but, in perspective, it's a healthy turn of events that will benefit the industry overall.''
Many more bankruptcies and failures are expected as the industry matures, Cohen said. But, in the end, the successes will far overshadow the failures. No one remembers the 80 automobile companies that were created in the 1930s, he said, adding, "This is Darwin at work."
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