The Day Ahead: Drkoop.com goes critical

Drkoop needs intensive careThose top-dollar portal deals looked like such a good idea last year for many young, free-spending dot-coms. Now those deals could haunt both the up-and-comers and established Net giants.

Drkoop.com made a big splash last July when it inked a four-year, $89m (£56.42m) alliance with America Online. Too much money? Nah, branding is everything. Investors bought into it, and even boosted Drkoop.com on the AOL deal. Drkoop.com also inked an exclusive content pact with Disney's Go.com last April. In both cases, Drkoop.com paid heavily to be the exclusive health content provider.

Unfortunately, Drkoop.com is running low on cash -- really low on cash. The company said Tuesday it will report a larger-than-expected loss on weak sales.

In fact, the initial value of the Drkoop.com-AOL deal currently eclipses Drkoop.com's market capitalisation. Drkoop.com still owed AOL $65m from the July deal. Is it just a coincidence that Drkoop.com's lead feature Wednesday morning was 'Facing Grief'?

Enter the restructured portal deals. Now instead of cash, lucky AOL gets 3.5m shares, or 10 percent, of Drkoop.com. The modified AOL deal now expires April 15, 2001. Go.com also gets Drkoop.com warrants in lieu of cash.

Both portals would have taken cash over stock. Of course, it's better than nothing, but would you take Drkoop.com shares right now? It may not be long until Drkoop.com shares are worth nothing. You can bet AOL isn't going to push Drkoop.com on its users without some real greenbacks coming its way.

On its latest conference call, AOL execs shrugged off the dot-com cash crunch and said the company wouldn't be affected. AOL had a $2.7bn backlog of advertising and commerce revenue as of March 31. Drkoop.com's woes won't dent AOL.

But our guess is Drkoop.com is just the beginning. There are so many strapped dot-coms such as CDNow with expensive portal deals and no cash. Beyond.com recently terminated a host of marketing deals with ZDNet, publisher of this site, Yahoo!, CNet and Excite@Home.

If dot-coms start paying with stock, AOL and its portal pals could wind up owning stakes in a bunch of worthless.coms. If Drkoop.com shares somehow rebound, AOL could do well. But it's hard to see Drkoop.com getting better. The company retained Bear Stearns to pursue financing and strategic alternatives.

What alternatives? Drkoop.com can't sell shares. It certainly can't take on debt. CEO Donald Hackett said the company has had a few "talking point" offers, but none that required a vote from the board of directors.

The clock is ticking and Drkoop.com has less than five months of cash left -- and that's after a drastic belt-tightening. After squirming out of its pricey portal deals, Drkoop.com will now only burn through $2m a month. Meanwhile, revenue is dwindling because the company brought its ad sales in house.

Hackett played up the fact that Drkoop.com was "addressing the cash issue." It would have been nice if the company thought of the cash issue before it fell ill.

Despite an auditor's report questioning its viability, Drkoop.com's two primary underwriters -- Bear Stearns and Chase H&Q -- were clinging to "buy" ratings ahead of the company's latest diagnosis. Wit Capital, another Drkoop.com underwriter, cut the stock to a "hold" April 3.

Will the underwriters finally be forced to downgrade Drkoop.com? Bear Stearns couldn't comment on what it will do with Drkoop.com's rating -- it is advising the company on "strategic alternatives." Would Bear Stearns really downgrade a company it's trying to sell?

Chase H&Q analyst Stephen Fitzgibbons didn't return calls for comment.

Key tech earnings

Nortel Networks zipped past Wall Street estimates with first quarter earnings of 23 cents a share. Nortel also upped its revenue growth targets to 30 percent to 35 percent. Nothing to complain about there.

EBay delivered first quarter earnings of 6 cents a share, on sales of $85.8m. It also set a 2-for-1 stock split. The results easily topped estimates. Point to ponder: eBay also has a big distribution pact with AOL. The difference? EBay can afford it.

Compaq met expectations with first quarter earnings of 16 cents a share. The PC maker isn't back yet, but it is making real progress. Look for better results in the second quarter and strong growth in the second half.

What do you think? Tell the Mailroom. And read what others have said.

See ZDII for US tech investor news.

See techTrader for more technology investment news, plus quotes and research.

Newsletters

You have been successfully signed up. To sign up for more newsletters or to manage your account, visit the Newsletter Subscription Center.
See All
See All