When the history of the great dot-com investment bubble of 1996-2000 is finally written, surely a few select comments will be heard from some quarter or other regarding the role that Wall Street has played in this game. It’s called How to Fleece the Public and Get Away With It.
One of the more vivid examples of that fleecing was the initial public offering of Salon.com Inc., the San Francisco-based Webzine. This desperately struggling company perfectly encapsulates the failed promise and doubtful future of an entire generation of IPOs in the dot-com “content” space.
These are companies that never should have been taken public in the first place but were dumped on the public anyway. The senseless business theory that lured in the gullible: That advertising alone could support “content” marketing on the Web this when, in many cases, the advertising and marketing costs of the content companies themselves were greater than the total advertising revenue they collected.
Worst of all, it was the IPO proceeds from one company that became the ad revenue of the next company a kind of Wall Street-financed merry-go-round in which dot-com startups became little more than a capital transfer mechanism from Wall Street to Madison Avenue. It was all dependent in the end on the continuing flow of funds from the new-issue market a flow that was destined to end sooner or later, and now has done just that.
The bad guys in this tale? Fee-obsessed underwriters who couldn’t say no to seven- and eight-digit commissions, and thereupon set the merry-go-round whirling to create a market for deals that had “crash and burn” tattooed all over them. The stupidos they preyed upon? Anyone who failed to read and heed the exculpatory warnings that came emblazoned across every prospectus: Caution, this deal is going to blow up in your face.
Editorial excellence
In case you might not be familiar with it, Salon.com is one of the best, most imaginatively written “magazines” on the Web. It routinely publishes such writers as Camille Paglia, Garrison Keillor, and many others. The trouble is, this editorially excellent content site for culture and political commentary hasn’t been able to make a dime of profit from day one, and it’s hard to see how it ever will. The operation’s costs are too high, its revenue is too low, and demand for what it offers the public is simply too limited.
But common sense and simple arithmetic didn’t stop Salon.com’s underwriter, W.R. Hambrecht & Co., from taking the company public in a much-watched IPO on June 22, 1999, at $10.50 a share. For a brief and glorious moment a few days later, Salon.com touched an intraday high of $15.12, giving it a market value of $162 million, as all involved congratulated each other on their collective financial genius … while leaving for another day the annoying problem of what to do when the $24.9 million in IPO proceeds ran out.
And now, 12 months later? Well, a lot has happened.
All of it was inevitable and easily foreseen, and for Salon.com it all spells disaster. For starters, the entire dot-com sector has crashed and shows no signs of reviving. Meanwhile, the IPO window has slammed shut, and venture capital fund managers have taken their phones off the hook and gone to work in the garden (or maybe to hang themselves). And in the middle of all this, the folks at Salon.com look to be running out of money.
Falling down
With its stock now trading around $1.30 a share, Salon.com has a value of about $15 million, meaning that the company now faces the threat of de-listing from the Nasdaq for failure to meet minimum tangible assets, net revenue, and market-cap standards.
So it’s not surprising that, in a desperate bid to stay in business, Salon.com announced on June 7 that it was firing 9 percent of its staff, while trimming projected spending by 20 percent. Considering that most of the 13 people being axed are editorial employees, and that the high quality of its editorial content is the only thing Salon.com has going for itself, well, we need not dwell at length on the apparent business acumen of the knuckleheads who are running the company other perhaps than to suggest that the shareholders would evidently have been better served if the suits in charge had decided to let themselves go instead.
Salon.com is hardly the only dot-com now handing out pink slips. In the last month, more than 30 different Internet operations almost all of them in the business of trying to deliver news, entertainment or other such “content” to consumers have fired at least 3,500 employees altogether.
The one thing almost all these companies have in common is the confused, “we’ll figure this out as we go along” nature of their business plans and strategies for actually making money. Yet Wall Street financed them anyway, and the reason is hardly mysterious: For every dollar raised in an IPO, the underwriter typically gets 7 to 8 cents.
How bad has this exploitation of the public been, really? Well, consider the following factoid, mined from the Internet database of Hoover’s Inc., which itself went public last July and began trading at $24 and now sells for around $7.50: If you bought one share, at the first trade in the aftermarket, for every Internet IPO that Goldman, Sachs & Co. has managed since its underwriting of Yahoo! Inc. in April 1996 some 60 deals in all you’d have done spectacularly well in less than half a dozen of them (Yahoo, RealNetworks Inc., eBay Inc., DoubleClick Inc.) and you’d at least have come out ahead, so far, in maybe 15 more.
As for the rest about 40 stocks in all you’d have done so poorly that your entire portfolio would now be down about 8 percent. You’d have been better off leaving the money in a coffee can in the kitchen.
Christopher Byron is a columnist with Bloomberg News.
