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Brick Houses Are Sturdy After All


Finance: E-Commerce

Brick Houses Are Sturdy After All

Suddenly, Old Economy companies look cool to Wall Street

Last year the biggest threat to many brick-and-mortar companies came from Internet startups. eToys Inc. had a higher valuation than Toys `R' Us Inc., as did E*Trade Group compared with Donaldson, Lufkin & Jenrette. But today, the world looks a lot different.

E-tailing stocks have dropped an average of 75% over the past 12 months (table). While stocks of traditional retailers have dropped as well, their tumble has been a fraction of the e-tailing nosedive. "E-tailers sent a real wake-up call to traditional brick-and-mortar companies. But now the [latter] are regaining their lead," says Chip Adams, a partner at Rosewood Venture Group, a San Francisco venture-capital firm.

In fact, a flip in valuations has taken place. Consider Toys `R' Us. Its total market cap of $3.8 billion--now including its Web site, toysrus.com--is greater than eToys' $828 million. The same is true in E*Trade's case: DLJ's market cap has surpassed that of its online competitor. "There's been a complete round-trip of thinking," says Jonathan F. Foster, chief financial officer of toysrus.com. "Toysrus.com is now the fifth-most-trafficked company on the Web."

What happened? Suddenly, brick-and-mortar companies look cool to Wall Street. They have lots of attractive features that most Internet companies lack, such as cash, well-known brand names, and--what was unthinkable six months ago--the luxury of having a bit more time than e-tailers to consider their Internet strategies.TARGETS. For one thing, the change in relative valuations makes their Internet competitors potentially attractive acquisition targets. Peapod Inc., the online grocer, for example, was at risk of running out of cash when a white knight appeared in the form of Royal Ahold, the Dutch owner of supermarket chains, which invested $73 million in the company. That isn't to say all Internet companies are doomed to fire sales. Recently, venture capitalists Capital Z Partners and General Atlantic Partners created a $300 million incubator fund to invest exclusively in financial-services Internet companies. "New Economy companies will be under more pressure to build partnerships and alliances with old economy companies," says Pascal Levensohn of Levensohn Capital Management, a San Francisco technology fund.

But that doesn't mean brick-and-mortar companies are off the hook. "There's still pressure for companies to move quickly. The cost of not participating on the Internet remains very high," adds Levensohn.By Debra Sparks in New YorkReturn to top

TABLE

Bricks and Mortar Strike Back

Change in stock price from 52-week high

E-TAILER RETAILER

ELOAN -94% DIME BANCORP -22%

DRUGSTORE.COM -88 DUANE READE -8

CDNOW -84 MUSICLAND -45

ETOYS -91 TOYS `R' US -33

DATA: ROSEWOOD CAPITAL

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