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ANALYSIS November 2, 1999

Why FortuneCity Will Seek Its Fortune on Nasdaq
Its first listing on Germany's Neuer Markt is shriveling. So it's coming back to the States for a boost

There was much fanfare in Germany last March when FortuneCity.com went public. Although the Web-site community builder's headquarters is on Seventh Avenue in Manhattan, it decided to eschew Nasdaq and list its shares on the booming Neuer Markt, Germany's new growth-company stock market. Billed as Europe's first dot.com IPO, the FortuneCity offering was 37 times oversubscribed when it first came out. Investors quickly bid up the company's shares to $33.50, nearly double its opening price. And CEO Peter Macnee confidently told reporters that FortuneCity was "really a European company," despite its location.

Oh, how pride often goes before a fall. In the intervening months, FortuneCity's shares have dropped by more than two-thirds from their peak, to about $9.50 today. And the chagrined Macnee is scrambling to add a Nasdaq listing by early next year that he thinks will buoy up the price again. "I don't know why the shares are down so far," he groaned one recent morning at the company's New York office (see the Q&A: "We're Not Stopping. We're Not Taking a Breath"). "But I think it's because there aren't enough comparable companies in Europe. And I don't think [Europeans] understand how big we are" in the Internet world.

By listing in Europe, FortuneCity had thought it was simply showing its fealty to one of its most important growth markets. Now the company's strategy is to build up hip, local language Internet "communities" outside the U.S.

WRONG FOR FRANKFURT. But in financial terms, FortuneCity has become a case study in how dangerous it is to assume that Europe's nascent capital markets will simply mirror their U.S. counterparts. Europe is ahead of the U.S. in some areas (mobile communications), but behind in many others. An investment story like FortuneCity's might well seem like a winner in Silicon Valley, or Silicon Alley. But the same story won't necessarily play in Frankfurt and Munich. As a result, FortuneCity may have fallen through the cracks with investors.

One big problem for Internet outfits trying to fund themselves in Europe is that Internet stocks simply haven't done very well in many countries. That's true in Britain as well as in Germany. Shares of British Net hopefuls like Freeserve showed great promise at first -- only to tank, too. That's partly because Internet use in most of Europe is still less than half the U.S. level.

But it's also true that the dynamics of European markets tend to differ from those in the U.S. Many German investors simply think there are better, less risky investments on the Neuer Markt than Internet stocks. For instance, entertainment is a mature industry in the U.S. but is still underdeveloped in Germany, where shares of media and entertainment startups are soaring. Many also think the battered European biotechs are overdue for a comeback. Plus, telecom deregulation only hit two years ago -- long after it happened in the U.S. -- fostering nimble upstarts hoping to become the German version of Sprint or MCI.

"TOO DIFFICULT TO FOLLOW." Plainly, FortuneCity took a risk by having its primary listing abroad when its headquarters is in the U.S. German investors tend to want ready access to company executives. For instance, bellweather Neuer Markt investor Kurt Ochner, who runs the $830 million Bank Julius Baer German Special Stock fund from Frankfurt, got a small amount of FortuneCity stock at the IPO price. "We kicked it out right away," says Thomas Röder, a top Ochner lieutenant. "It was not a 100% German company. When management is in New York, it just makes it too difficult to follow."

German investors also are more conservative than Americans. They're less ready to accept upfront losses than American investors are. FortuneCity shed $4.4 million in red ink in the first six months of this year, about double its sales during the period. "Fund managers [in Germany] come in asking us about dividend schedules," Macnee says incredulously. It's unusual, of course, for Internet startups to turn a profit, let along issue dividends.

Macnee contends that European investors simply need to be "educated" about Internet companies' tremendous potential. But the booming two-year-old Neuer Markt is so youthful that there are too few analysts around to do the job. The ones who know the company well have a bias because their banks handled FortuneCity's IPO, he says. In addition, handling Neuer Markt IPOs is highly lucrative for banks and brokers, and the analysts themselves admit they don't have much time to do fundamental research.

Nicholas Lovell, London-based analyst for Deutsche Bank, a co-lead bank on FortuneCity's IPO, has a buy recommendation out on the company. But he admits: "We've been absolutely flat out trying to get IPOs to market. There's no spare capacity right now to do independent research."

COMPELLING TALE. Macnee's challenge now will be to ensure that FortuneCity's story plays better on Nasdaq than it has in Germany. Oddly, considering the company's sagging share price, it's a pretty compelling tale. FortuneCity's immediate selling point is that, with over 3 million registered users, it's now among the top 25 sites in the world, as ranked by Net monitoring outfit Media Metrix. It's No. 15, according to PCData Online. Because ad revenues tend to go almost exclusively to the top 50 sites, being comfortably in the top rank is tremendously important. And Macnee hopes U.S. investors will pay more for that ranking than Europeans have.

Meanwhile, the company is making tremendous strides abroad. FortuneCity bills itself as a community, where Web democracy reigns. It gives "citizens" of its sites a big chunk of free computer space with which to build their own Web sites. It's aim is to emulate the success of other communities, like GeoCities Inc., which recently was bought out by Yahoo! for about $4 billion in stock.

And it's adding new content to keep users at its sites for longer periods of time. Among the deals: It bought Australian Internet games company Hotgames.com in September and recently paid $1 million for 20% of Bravenet Web Services, Inc., an outfit that specializes in simple-to-use Web tools.

Macnee's forte at Millicom International was setting up cell-phone operations in emerging markets. He's starting to do the same thing for FortuneCity. The company has launched an English-language site in India. Now, it's moving into China, Korea, and Russia with local-language sites "With the Chinese and Russian languages, we're going to cover the majority of the world," Macnee says. "That's our goal: To take our product to as many people as possible and be a first mover" into new markets.

WE'RE NOT IN KANSAS. Will Nasdaq investors pay more for such prospects than European ones have? There's some precedent to think they might. For instance, European biotech powerhouse Qiagen says having a joint Neuer Markt-Nasdaq listing has helped its share price in recent weeks. The Neuer Markt has tanked recently, but biotech stocks are hot in the U.S. U.S. investors have bid up Qiagen's shares nearly 40% in the last two months, to around $50.

With U.S. investors increasingly convinced that the Internet's next big wave will be in Europe and elsewhere overseas, Macnee may well have an easier sell in New York than he did in Frankfurt. At very least, investors may see FortuneCity as a juicy takeover morsel for a bigger player, as Geocities was for Yahoo!.

In the meantime, other U.S. Internet execs may want to ponder FortuneCity's story. The lesson: Europe ain't like the U.S., in more ways than one. And companies that go in thinking it is, probably will pay a price for their miscalculation.

By Thane Peterson for Business Week Online

EDITED BY DOUGLAS HARBRECHT _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

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