Battered E-Businesses Turn Away from Wall Street

Publicly traded e-commerce firms suffering from market-inflicted wounds could enjoy a second wind as private companies. Free from stark financial pressures, a few might even reemerge with newfound vigor, according to analysts.

"[Some companies'] reputations in the public market have been tarnished by the expectations of the broader market," US Bancorp Piper Jaffray analyst Jon Ekoniak told the E-Commerce Times.

"It makes sense for them to go private, to reinvent themselves without public scrutiny."

While a public-to-private move brings its own challenges, it may be some technology firms' only hope for survival.

Daunting Deadlines

Meeting quarterly and annual Wall Street expectations can preoccupy executives of public companies, often to the exclusion of other company goals, experts said.

"As we saw with Enron, the pressure to meet earnings numbers can lead companies to make questionable decisions," Morningstar analyst David Kathman told the E-Commerce Times. "Or [they might take] overly aggressive actions that are not in the best long-term interest of the company."

Struggling e-commerce firms that shun the public spotlight by going private can make nimble investment decisions and potentially turn their fortunes around.

Management time previously spent answering to stockholders can be devoted to reengineering critical components of the company, Ekoniak said.

Blum Bolsters Buy.com

As Buy.com CEO Scott Blum would attest, taking a public company private can dramatically improve its competitive position.

In December, Blum paid US$13 million to buy back control of the sputtering e-tailer he founded in 1997.

Buy.com raised $209 million through its initial public offering in February 2000, as its share price swelled to $35. But by January 2001, the stock had sunk below $1 and Nasdaq delisted it in June 2001.

Now, Blum plans to rescue his company -- far from the prying eyes of Wall Street.

"Public opinion, as manifested in the stock price, influences the competitiveness of a company," Ekoniak said. "You can potentially improve your competitive position by going private."

Selling Out

Management buyouts are one way for companies to exit the public markets. But businesses also can make such a move on the backs of private acquirers.

After three years on the public market, Outpost.com went private in November 2001 by virtue of its sale to Fry's Electronics. Outpost stock peaked at $45.50 in November 1998, but crawled away from the Nasdaq at 24 cents.

"Fry's acquisition of Outpost.com proved to be our best opportunity to enhance stockholder value," Outpost founder Darryl Peck said.

Risk of Blacklisting

But going private can place new burdens on company leaders. Stigma associated with such a move could crimp some firms' comeback plans.

"These companies can end up in a fallen-angel category that might be difficult to get out of," Ekoniak noted.

However, he added, one way companies can overcome this stumbling block is to rename the corporation, signifying a fresh start in a new direction.

Money Matters

What is more, Ekoniak said, newly privatized firms might face hesitancy from prospective customers and partners who rely on the financial transparency of public companies to inform their business decisions.

"Especially now, with the scrutiny of accounting practices, people like to see a reliable financial statement to see if it's a viable company to do business with," Kathman noted.

In addition to business prospects, investors in the private market also might balk at cutting checks for formerly public companies, according to Ekoniak. Therefore, raising additional capital to fund a turnaround could prove challenging.

For its part, Buy.com does not rely on steady streams of capital to support daily operations, which increases its chances for success as a private company, Kathman said.

Private Strategy

Mindful of the potential challenges involved, analysts still suggested that public technology companies should seriously consider privatizing as part of a survival strategy.

Ekoniak noted that even though such a strategy is somewhat unprecedented in the technology sector, current economic conditions may call for drastic measures.

Whether or not a company can succeed after going private depends on its management team's ability to focus on fundamentals and execute a turnaround, he added.