Dot-com dogs

With Net-stock fever showing no signs of cooling, mediocre IPOs are growing as plentiful as fleas on a stray hound.

By Mark Gimein

Dec 9, 1999 | "Going public," circa 1990: Build a company with substantial revenues and growing profits. Sell shares in it to investors who hope it will grow even bigger.

"Going public," circa 1999: Start a company, add a ".com" to the name, sell shares in it to investors who hope to make a quick killing before the Net frenzy ends.

There is hardly an investor who does not profess to believe that the frenzy for Internet stocks is a bubble waiting to burst. Yet the dot-com stock fever continues unabated. In November alone, 40 companies filed documents with the Securities and Exchange Commission announcing their intention to go public. Most are building their businesses around the Net, or at least claiming to.

Surely, not every firm that can boast of some relationship to the Net deserves a stratospheric valuation. Yahoo's market capitalization -- the total value of its stock -- is now over $80 billion. That's more than Disney -- a huge media conglomerate that owns a television network, movie studios, and, yes, its own Web portal. A share of Yahoo now costs over $300, and for each share Yahoo earned all of 25 cents in its last quarter. That leaves a ridiculous amount of ground for Yahoo to cover before its stock becomes a sensible purchase by any traditional metric.

But investment bankers continue to roll out companies they hope will catch the fancy of dot-com investors. The trouble is that many of these companies are unlikely to ever show a profit, and the bankers must know it. If truth be told, a lot of them seem designed to attract speculators who hope to make a quick buck selling their shares to someone else before the bottom drops out of the market.

What in more rational times would be considered mediocre IPOs are plentiful. Dozens of companies have filed documents with regulators that tell prospective investors that they have never made a profit and, moreover, expect no profits in the foreseeable future. There are more than a few -- like Buy.com, or video retailer Reel.com -- that lose money on everything they sell and hope to make it up on volume. There are others, like RealNames that have little more than one idea (in RealNames' case, giving Web browsers shortcuts to popular Web addresses) and an unusually punctuated name. Still others are just older companies with a dot-com smiley face drawn on them. Harris Black has been in the polling business since 1959, but it took a name change to Harris Interactive to get to an IPO and a $600 million market value.

Among the surrounding pitiful prospectuses, some soon-to-be-public Net companies stand out as more egregiously awful than the norm. How bad have things gotten at millennium's end? I took a tour through the upcoming offerings to find the mangiest dogs -- companies that might make a killing in the public markets, but look awfully unlikely to be big successes for the long term.

There were two criteria for getting on this short list. First, the initial public offering had to be underwritten by a major, reputable investment bank (there are plenty of blatant rip-offs among the tiny offerings underwritten by marginal investment bankers, and spotting those is just too easy). Second, there had to be something badly wrong with the company -- not just bad ideas or big losses, but the faint stench of a company that's a non-starter at best or a rip-off at worst.

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