STRATEGIES: Get ready for merger mania

Dot-coms expected to seek deals with catalogers

On the defensive from the dot-com upstarts, the majority of print catalogers have built Websites to complement their existing business. But in the wake of well-publicized snafus such as’s inability to fulfill holiday orders, not to mention the red ink that continues to seap from most of the virtual-only companies, it’s the dot-coms that are now on the defensive. And their subsequent strategy is likely to unleash a torrent of mergers and acquisitions involving print catalogers.

As the past holiday season showed, catalogers with transactional Websites enjoyed increased sales. For instance, within two months of its November 1999 launch, the Website of kitchenware cataloger/retailer Williams-Sonoma had sales of $6.1 million. An appreciably smaller cataloger/ retailer, food gifts marketer Mrs. Beasley’s, reaped Web sales of $2.1 million for the first two months its site was live. And gadgets cataloger/retailer The Sharper Image had December Web sales of $9.7 million – nearly 12% of its total December revenue.

But while many dot-coms also did boffo business, the consumer media zeroed in on their problems with deliverability, inventory management, and site performance. “Christmas ’99 was a watershed event,” says Kate Buggeln, executive vice president of LakeWest Group, a business-to-consumer consulting firm in Cleveland. “Everyone now realizes that the Internet isn’t all upside and potential.”

Already, the need for a stronger back-end has led several online-only marketers to acquire print catalogers. For instance, in August 1999, bought $15 million Humboldt Industries, producer of the Home Pet Shop and Dog’s Outfitter print catalogs. Even dot-com Goliath bought two catalogers – Tool Crib of the North and Back to Basics Toys – this past November, primarily to expand its product line, but also to help with order fulfillment and to gain more customer names.

“And Amazon has been the leader from the beginning, so it’s very illustrative of the trend,” notes Malcolm Appelbaum, principal in Wand Partners, the New York-based investment firm whose catalogs include Paragon Gifts and The Popcorn Factory.

The problems of online-only merchants extend beyond the back-end. Every storefront of a brick-and-mortar retailer and every edition of a print catalog is a means of advertising that pure-play Web companies lack. “Our titles have very effectively driven commerce to the Web just by promoting the URL in catalogs, and with no special offers,” Appelbaum asserts.

In fact, the power of print was enough to persuade specialty food gifts i.merchant to launch a print catalog in October. Likewise, wine e-tailer mailed a catalog this past holiday season.

The efficiency of acquisition

Catalogers, consultants, and dot-coms alike agree that a rush of M&A activity is inevitable. “Traditional retailers will realize that they can’t go the [e-commerce] route alone as they see the cost of building an online brand, the velocity with which they need to do it, and the inadequacy of their ability to do it,” says Ken Seiff, CEO of, a New York-based online-only store. “Likewise, many `pure plays’ will see the need for greater capitalization.”

The dot-coms, however, also see the need for staffers with direct marketing experience. While an online-only concern may be able to woo workers away from catalogers, it can take a great deal of time, effort, and stock options to build an entire team. “The first line of defense should be acquisition,” says Jim Adams, managing director of Boston-based investment bank Ulin & Holland. “Every time I go to a dot-com presentation, the first thing they ask is, `Where are the people with [direct marketing] experience?'”

But deals between catalogers and dot-coms won’t be as simple to negotiate as deals between two catalogers. “Valuation is going to be a big stumbling block,” cautions Wand Partners’ Appelbaum. As catalogers know all too well, even if they have been profitable for years, Wall Street values them significantly less than they do i.merchants that have yet to declare a profit.

“The e-commerce valuations are wild and crazy and more difficult to get a handle on. Most [Web pure-plays] show no profit, so you can’t take any multiples,” Adams says. When comparing dot-com companies to traditional catalogers, “we take a look at how many names they have and what value they’re putting on those names,” he says.

Besides, LakeWest Group’s Buggeln contends, in the grand scheme of things, valuations aren’t that significant. “If you had a bad Christmas, you’re going to be trying to fix the business, and that’s going to be more important than valuations to your stockholders.”

So if you’ve been thinking of selling your catalog business and heading to Tahiti, this may be your chance – provided you’ve got what the dot-coms want. The most attractive catalogs – even the smaller ones – have fulfillment capacity, have been around awhile, and have good systems and experienced direct marketing people, Adams says. “And as the e-commerce companies are building their e-lists, list experience will also be valuable.”

For her part, Buggeln expects certain market segments to see more M&A activity than others. Dot-coms that sell products that are tricky to fulfill (bulky home decor products, for instance) or require a lot of information or service (such as electronics) are more likely to be seeking catalogers in their market segment to merge with. And Bluefly’s Seiff notes that some markets, such as pet supplies and beauty products, are so overcrowded that consolidation will be vital to survival.

Seeking to acquire or merge with a dot-com company, but unsure of what to look for? “Catalogs should look for a company that has had exposure and success – not necessarily bottom-line success, but experience on the tech side,” suggests Jim Adams, managing director of investment bank Ulin & Holland. “They should make sure that the company’s Website is very developed, has lots of traffic, and is on lots of search engines.”

Regardless of how dazzling the dot-com’s technology, however, Adams adds that you should also look at the size and substance of the company’s house file and e-mail list. And don’t overlook what Ken Seiff, CEO of online-only marketer, says is “the biggest advantage any company can have: the ability to understand its audience and serve its customer better than its competitors.”

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