FINANCE Taking back the Web

As market cools, some spin back Web units Last year, multichannel marketers were racing to spin off their Internet divisions as separate public companies. Teen apparel marketer Delia’s did it in April 1999, spinning off its iTurf e-commerce/community network. Bookseller Barnes & Noble spun off its Web unit, in May ’99, as did vitamins manufacturer/marketer Vitamin Shoppe in October ’99. Multititle cataloger Hanover Direct went so far as to enlist the services of high-powered New York investment bank in Bear Stearns July 1999 to investigate the possibility of spinning off its Web division. And why not? Anything dot-com soared as soon as it hit Wall Street.

But this spring the dot-com stocks fell back to earth – and so did the market for initial public offerings. According to research firm Thomson Financial Services, 151 companies filed to go public in March, compared with 43 in August.

Now we may be seeing another trend: marketers bringing their spin-offs back into the fold. In one variation of the theme, pet supplies cataloger/retailer Petsmart, which owns as a joint venture with Web incubator Idealabs, invested another $15 million into the online marketer in July, bringing its share of to 48%. Just five months earlier, had filed for an IPO. (According to a company statement, the IPO hasn’t been withdrawn but rather is on hold.)

Then there’s the outright remerger, as is the case with Delia’s and iTurf. In August, a scant 16 months after Delia’s spun off iTurf, the two New York-based companies announced they would become one again. The merger of Delia’s iTurf, as the new $86 million company will be called, is scheduled to be finalized by year’s end.

And at least two analysts, who requested anonymity, predict that bookseller behemoth Barnes & Noble, whose IPO of raised $486 million – the largest-ever offering for a Web IPO – will reabsorb its online namesake into its core business. The closer the online bookstore gets to profitability, the quicker Barnes & Noble will want to bring it in, these analysts predict. As of press time, Barnes & Noble had not returned repeated phone calls.

Dwindling cachet “Internet commerce still holds a bit of cachet among investors, but I don’t see that spinning off [an e-commerce unit] would create a true business advantage anymore,” says Mike Petsky, CEO of New York-based market research firm Winterberry Group. “I think you should spin off only businesses that are sustainable in the long term.”

Unfortunately for some marketers, investors’ definitions of “sustainable” and “long term” have changed during the past year or so. At the height of the dot-com investment frenzy last year, IPOs were producing companies valued at up to 42 times their annual sales. And even the two-ton gorilla of online retailers,, didn’t try to hide that it would not turn a profit until 2001 at the very earliest.

But investors have grown less tolerant of e-commerce companies with $10 million in revenue and $100 million in losses. As a result, the Internet-only divisions have dropped in value. For instance, with its IPO closing at $22 a share, iTurf raised $106.2 million. But on Aug. 16, the day before it announced that it would be remerging with Delia’s, iTurf shares were trading at $3, down from a high of $24 in November 1999.

The stock price of iTurf’s onetime parent company was languishing too. On Aug. 20, Delia’s stock price was $1.81, down from its 52-week high of $13.25 in November 1999. On Sept. 25, Delia’s stock closed at $2.19 a share; iTurf’s at $1.51.

No regrets You might think that Delia’s could have saved itself a lot of paperwork and money had it decided not to spin off iTurf in the first place. But Delia’s president Evan Guillemin says that the spin-off, no matter how short-lived, had its purpose. “It allowed us to build our iTurf business by getting good people who would build a strong technology base,” he says. “There’s no question that to attract the top talent, we had to play in Web currency” – use stock options to lure job candidates. What’s more, he contends, the spin-off allowed each company to strive toward different goals: building an online presence for iTurf, and expanding in retail for Delia’s.

Now, though, some speculate that Delia’s iTurf should be able to improve its bottom line by eliminating duplicate positions and taking advantage of economies of scale – which should, of course, please investors. Delia’s will now have positive cash flow in the fourth quarter, says Kevin Silverman, managing director at Chicago-based investment bank ABN-AMRO. Combine that with integration among all channels, and Delia’s has a stronger story to tell the Street.

In short, it seems that marketers are taking to heart the axiom about the sum of the whole being greater than its parts. “The channels of direct marketing – Internet, retail, and catalogs – are all in concert with one another,” Petsky says. “And that’s how executives should approach the business. They should not be concerned with the flavor of the day that the public markets are dictating.”

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