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The Prodigal Dot-Coms' Return


Two years ago, spinning off dot-com divisions looked like a dream deal to dozens of companies. They could raise cheap capital--and mine a vein of richly valued stock options to motivate key staff. "It allowed us to keep moving along with our Internet strategy without having to write a massive check that would dilute earnings," says Thomas O. Staggs, chief financial officer for Walt Disney Co. (DIS

)

With Internet stock valuations in the basement, that dream has shattered, and many companies are reversing course. "Now, companies realize that their Internet divisions are not separate businesses at all, but just another distribution channel," says Russell Miller, a partner at SCA Consulting in New York City. That's why Disney bought back the Walt Disney Internet Group in March. Now, NBC, Staples (SPLS

), and Credit Suisse First Boston (DIR

) are all attempting to buy back their dot-com shares, mostly at prices far lower than they sold for originally. NBC, which sold shares of NBCi (NBCI

), its Internet division, at $81.38, in February, 2000, hopes to repurchase them at $2.19, while CSFB plans to buy back CSFBdirect, which went public in May, 1999, at $20, for $4. "They issued shares at a time when they got top dollar. Now that the experiment has failed they're cleaning it up at very low prices. If I were a shareholder, I'd be pretty distressed about it," says Jeffrey Haas, professor of securities law at New York Law School.

Some dot-com shareholders are incensed enough to sue. When Credit Suisse Group bought Donaldson, Lufkin & Jenrette Inc. last year for $12.4 billion, a 36% premium, it didn't purchase the shares of DLJdirect, later renamed CSFBdirect. Instead, it left 18.4 million, or 18%, of the shares of the Internet brokerage in public hands. "What we have alleged was that DLJ's board of directors knew it would be detrimental to the stock going forward, and they had a fiduciary responsibility to include the tracking stock as part of the deal," says Laurence D. Paskowitz, of Abraham & Paskowitz in New York, representing shareholders in a class action. CSFB is offering $4.00, a 60% premium to the $2.50 close the day before the repurchase was announced in March. But that's still 64% less than DLJdirect's $11 close the day before CSFB announced it was buying DLJ in August. CSFB executives declined to comment.

NBC, part of General Electric Co. (GE

), offered a 66% premium on Apr. 9 of $2.19 for NBCi's shares, which closed on the previous trading day at $1.32. But it is currently being sued by shareholders for breach of fiduciary duties over the proposed buyout. NBC says it will contest the suit vigorously. Martin J. Yudkovitz, president of NBC Digital Media, which created the NBCi portal, defended the company for trying. "We thought the economics of the sector might be the brightest of all," he said. Instead, "the portal sector turned out to be one of the weakest. It simply didn't have a viable business model." NBC now plans to integrate its Internet division with its other entertainment businesses.

Staples Inc. faces a different problem. It's the shareholders in the parent, not the dot-com, who are upset. A class action alleges that the purchase is "a waste of Staples' corporate assets," according to securities filings. The buyback could cost the company up to $90 million. Staples' dot-com was originally valued at $3.25 a share when the tracking stock was created in November, 1999. At the time, it was given to Staples directors, venture capitalists, and some Staples employees. The goal was to take the shares public the following year, though that didn't happen. Now, Staples intends to buy the shares back at about $7, a 115% premium. A company spokesperson says the price is justified by a fivefold increase in Staples.com sales since fiscal 1999. The unit is expected to be profitable later this year.

Unhappy though they may be, shareholders in the spin-offs are better off than those who owned the likes of eToys, Pets.com, and Garden.com. "There was no corporate parent to bail them out as their shares tanked," says Marc Baum, CEO of IPO.com Inc., a financial data and software company. That's cold comfort to shareholders nursing big losses. By Debra Sparks in New York


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