The Day Ahead: 'Band-Aid financing' won't work for some dot-coms

Instead of going out of business quietly, struggling dot-coms are raising more money in the hope of fighting on
Written by Larry Dignan, Contributor

Those cash strapped dot-coms sure are a resilient bunch -- for now. Instead of going out of business quietly, struggling dot-coms are raising more money in hopes fighting on. Unfortunately, the new money only puts off their inevitable demise. It's like putting a Band-Aid on a gaping wound.

In recent weeks, many struggling dot-coms have announced cash infusions. And plenty of others are on deck.

Is this good news in the big picture? No. For the long-suffering shareholders of these companies, it means they could suffer a little longer until a buyer comes along. It's also bad news for the Net sector overall. There are too many Internet look-a-likes. Until the also-rans consolidate or go under the glut will continue.

"We all know there are way to many Internet companies, most of which have limited points of differentiation," said Lauren Cooks Levitan, of Robertson Stephens. Levitan said consolidation needs to pick up, and that many companies are pursuing "Band-Aid financing."

Here are the companies that are buying a few more days on life support:

  • Value America raised $90m (£60.42m) in additional financing. The company will sell $60m in stock to the Acqua Wellington North America Equities Fund. The company's major investors -- including Vulcan Ventures -- handed over $30m. Bottom line: Competition is still stiff for Value America. Big investors are just trying to recoup losses.
  • Peapod which was down to $4.6m in cash as of March 31, raised $73m from Royal Ahold, the international food provider. Under the agreement, Peapod will remain independent as the companies develop their online grocery initiatives. Bottom line: Peapod has more cash, but it's still small change compared to companies like Webvan and Home Grocer.
  • CDNow is attracting cash too. Mexican billionaire Carlos Slim Helu has bought a 9.2 percent stake in the company last week for $52.8m CDNow has enough cash to last through the second quarter, and said it hopes to have a merger or investment deal by the end of June. Slim could be the company's sugar daddy and is "engaged in discussions with the company regarding a possible additional investment." Bottom line: CDNow has to find a buyer because it can't compete with Amazon.com's scale.
  • What's next? Drkoop.com is looking for financing or a buyer. Like CDNow, Drkoop.com has the eyeballs and content to attract a buyer, but there's baggage.

    "Companies should be driving toward more permanent solutions, which may mean the end of their independent existence," said Levitan.

    Hewlett-Packard is delivering on its revenue growth promise. After the closing bell, HP reported second quarter earnings of 87 cents a share, a nickel better than First Call consensus estimates. The results exclude one-time items such as equity gains and charges.

    Revenue from continuing operations jumped 15 percent for the quarter ending April 30. Revenue from continuing operations was $12bn, up from $10.5bn a year ago.

    More importantly, HP reported some strong growth in key areas. HP said printer and imaging device sales surged 13 percent. Computing systems sales were up 19 percent from a year ago. Unix server revenue was up 26 percent with orders gaining 32 percent. Home PC sales were up 85 percent. Services sales were up 12 percent.

    These aren't exactly Dell's numbers, but they're a big step for HP. So what's the problem? Analysts may fret that HP is getting most of its bottom line from low-margin products. Meanwhile, HP's Unix growth is an easy comparison.

    The third quarter will be telling for HP -- it won't have an easy year-over-year comparison.

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