GeoCities, a Web IPO wonder?
The sort of worthless garbage that's been pouring from their deal-machines in the name of "capitalizing the Internet" is simply a disgrace - and in time it is bound to come back and bite them.
Latest example: a planned IPO for GeoCities Inc., a Web-site "community" business with an unsettled and green-horn management team, without an easily explained product or service, in a business with no real barriers to entry, and with no prospects of earning a profit in the foreseeable future - or maybe ever. This is the company in whose name Goldman, Sachs & Co. now proposes to raise as much as $72.4 million in a deal that could value this essentially worthless operation at $360 million or more.
There was a time not so many years ago when Goldman simply wouldn't do an underwriting for any company unless it had, at a bare minimum, five uninterrupted years of profits as a privately held business before trying to tap the public markets. In those days, an offering like GeoCities would have been literally laughed out of the room - and the person behind it would have soon been looking for new employment opportunities.
But those days are now a fast-fading memory, as Goldman and the other fancy-pants shops of Wall Street scramble to cash in on the Internet investment mania that is sweeping the capital markets. They're all trying to mimic Hambrecht & Quist and Robertson Stephens & Co., the West Coast IPO mills that are to Internet deals, what Drexel Burnham & Co. once was to junk bonds.
In the process, every valuation technique for determining the worth (or lack thereof) of a business has been thrown out the window, as investment bankers now routinely attach preposterous prices to IPOs while hiding behind the prospectus fig leaf known as the "Risks And Uncertainties" section.
This, of course, is that part of the document where the underwriter lists every conceivable reason he can think of as to why the business will fail - and in Internet deals you'll find page-after-page of them. Why list them? Because the Securities and Exchange Commission requires it, and besides, it gets the underwriter off the hook legally when the business meets its inevitable end and angry investors start demanding an explanation. When that day comes, the underwriter can simply point to the prospectus and say, "Hey, didn't you read it? I told you something like this was going to happen!"
The GeoCities offering is a textbook example of this game. GeoCities "business" consists essentially of maintaining a Website where individuals can post personal mini-Websites all their own. The company maintains 40 different "themed neighborhoods"-sports, politics, finance, etc.-from which individuals (known quaintly as "homesteaders") can pick and choose to decide which one is best suited as a place to locate his or her personal Website.
According to the IPO prospectus, more than 1.5 million people now maintain personal Websites of one sort or another on GeoCities' servers - and GeoCities has itself become the fourth most heavily trafficked site on the Web. Yet the whole thing is being supported by $1.5 million worth of desks, chairs, computers and a Web-hosting agreement with Exodus Comunications Inc. No big barriers to entry there - and indeed, as the IPO acknowledges, virtually any Internet or online service provider is potentially a competitor already.
Sole purpose
In fact, the entire rigamarole of homesteads, themed neighborhoods and whatnot exists for exactly one reason: To attract advertisers to the Geocities Website. But GeoCities is, in effect, chasing the same advertisers that every other so-called "content provider" on the Web is chasing, and it has been clear for a while now that there simply isn't enough to go around - which is why nearly every advertiser-supported operation on the Web is losing money.
More than that, the quality of GeoCities' advertising mix really stinks. The IPO lists advertisers like AT&T, General Motors, Honda, Toyota, Sony, IBM and American Express. But the company's biggest single advertiser is none of the above. In reality, it's Egghead Inc., the troubled software retailer that is fighting for its life on the Internet. Egghead alone accounts for 13 percent of the company's advertising revenues - which themselves equal 90 percent of all the net revenues the company now collects.
This is hardly a stable revenue base on which to build a business. And it certainly doesn't inspire confidence that much of these revenues come from ultra-short-term advertising contracts of only one or two months' duration.
But the real giveaway as to what this IPO is all about can be found buried deep in the registration statement, wherein the company confesses that it really has no need for the IPO's proceeds right now at all. And why should it, with $25 million in cash and short-term investments on hand via such deep-pocketed backers as Softbank of Japan, and $22 million of working capital now showing on its balance sheet, the company has more than enough money to fund operating losses that are currently running at about $12 million a year.
Needs cash to survive
No, the real reason for the IPO is to prepare for the huge additional outlays the company faces to stay afloat a year or two down the road. Thus, as the IPO states, the "primary" reason for the offering is" to create a public market for the common stock [and] to facilitate the Company's future access to public equity markets and to obtain additional working capital."
In other words, what's really going on here is a ploy by the company and its underwriters - a three-firm group headed by Goldman, Sachs - to get a stub-end of GeoCities stock trading in the marketplace now, when Internet stocks are so hot they glow in the dark. Then, six to nine months from now (when one presumes the stock has doubled or maybe even tripled in value), the game-plan will be to pile back in with a second offering ... and after that a third and maybe a fourth.
And make no mistake: they'll be back, too. The only difference the second time around will be that the company will really need the money.
We can be confident of that fact because it says so, in so many words, right there in the IPO. More than simply acknowledging (as nearly all these Internet IPOs do) that it has never earned a dime of profit and doesn't expect to "for the foreseeable future," the company further fesses up that it may well "need to raise additional funds in the future."
In fact, GeoCities will need to raise a lot of money. That is because the company says it plans to grow its business aggressively. Yet at the same time it also acknowledges that it has no expectation of generating any actual earnings. So, to put the matter at its bluntest: Where will the money come from? From the investing public, where else!
Not a business at all
The truth of the matter is, GeoCities isn't a business at all. As outlined in the IPO it amounts to little more than a thinly disguised charity - just as nearly all the Internet offerings do. So long as the market for them remains hot, the economy stays bullish, and Wall Street has capital to invest in chronically money-losing businesses, these businesses will survive.
But it won't take much of a downturn in either the economy or investor sentiment for the Internet bubble to burst and investment capital to dry up, and stocks like GeoCities to become overnight catastrophies.
People forget all too easily how much blood can be spilled in a downturn - and many of the wildest champions of Internet stocks like GeoCities were still in diapers when the last significant downturn came. That was the 1974 bear market, during which such well-established firms as Avon crashed by 87 percent in less than two years - from $140 to less than $19 per share.
Nor was Avon alone. During the 1974 bear market, Coca Cola crased 70 percent, Kodak fell 62 percent, McDonalds fell 62 percent, Polaroid fell 91, and Merrill Lynch fell 86 percent.
If disasters like that can befall even blue chip stocks, what's in store for a stock like GeoCities? Want to find out? Then go ahead and buy some.