Buy.com: How Soon We Forget
"Cream is not the only bovine product to float to the top in a bull market." -- Roger McNamee, 2001
Are we in a bull market again? You might think so, judging from what floated to the top today. Until this morning, I could only imagine what an aging hippy must feel like when he hears Jimmy Hendrix's Purple Haze on the radio and has a "flashback." I think I had such an experience over a bowl of cereal at 8:00 a.m. when I read that Buy.com is going public. Again. Yes, that Buy.com.
If you're old enough to remember the dot-com bubble (which would make you at least 10), you probably recall Buy.com. After raising $90 million from VC firm Softbank Capital Partners, it went public in 2000 on a business model that consisted of selling retail products at a loss and trying to make up the difference on advertising. It was insane, we said. It'll never work, we said. Then we watched its market value rise above $3 billion.
A year later, Buy.com's stock price fell to pennies, and the company was de-listed from the Nasdaq. In November 2001, the company's founder, Scott Blum, took Buy.com private for 17 cents a share. You may remember Blum from his previous venture, storage systems maker Pinnacle Micro. In 1997, he consented (without admitting or denying wrongdoing, as they say) to a cease and desist order from the Securities and Exchange Commission, which charged that Pinnacle Micro had improperly recognized revenue.
When I looked at the prospectus for the new Buy.com, I so wanted a glorious comeback, a profitable phoenix from the ashes. Here's what I found: a net loss of $15 million on revenues of $291 million last year; declining gross margins of 10.2%; 97% of revenues from sales of computers and consumer electronics (that would explain the declining gross margins); $398,000 of cash on the balance sheet; an accumulated deficit of $409.6 million; negative stockholders' equity of $29.5 million; and $22.7 million in outstanding loans owed to Blum, who has been financing the company out of his pocket.
As those numbers show, this company could sure use some cash. Yet much of the proceeds from Buy.com's proposed IPO aren't likely to wind up in the company's coffers. Blum owns 98% of Buy.com, and any money from sales of his shares will belong to him. (We don't know yet how much stock he or the company intends to offer or at what price.)
There are glimmers of hope in Buy.com's numbers. Last year, revenues grew 22% from 2003, and the net loss dropped 40%. If the company raised some venture capital, diversified its revenue sources, and expanded its gross margins, who knows? But at its current stage of development, is the IPO market the right way for it to raise money? Shouldn't a company like Buy.com sell shares to private-equity investors, who might even take some stock off of Blum?s hands?
If IPO investors are willing to take a flyer on Buy.com, that's their right. But what would that say about hysteria creeping back into the stock market? My prediction is that this deal won't get done. Maybe Blum is finessing an acquisition of Buy.com. Wait, my flashback is returning?didn?t I say these things five years ago?
TrackBack URL for this entry:
Thanks for this article. I have used buy.com and I loved the service. I actually liked it better than Pricewatch, dealnews, ebay, and amazon.com. I thought the service and website were very easy and efficient to use. So, when I heard about their upcoming IPO, I was getting ready to jump in. I didn't realize that they went public before and then receded back into private in 2000, because I was in high school then. Wow, you just saved me some money. Thanks
Posted by: Jeffrey Broussard at December 10, 2005 01:56 PM
You left out a few interesting facts:
Blum just sued Merrill Lynch, the bankers for the first IPO, blaming them because he didn’t personally make much money from the IPO (Hmmm, and I thought he didn’t make any money because the Street figured out his business model didn’t work before his lock-up expired. Go figure.). It makes you wonder just how far his new bankers will go for a quick commission (Thomas Weisel, that means you), and what kind of favors they’ll need to cash in to actually sell this dog.
It's also interesting to note that the board of Buy.com is comprised of a close circle of Blum’s friends and former employees, with no independent oversight. Will be fun to see how long they last before they get into SEC trouble (it didn't take long at Pinnacle, and that was BEFORE Sarbanes Oxley).
Fun fact #3: You'd expect the company’s president to be a retailing expert, or maybe an e-commerce guru. Nope, he's a securities lawyer specializing in – guess what – IPO’s. I think I'm starting to get the picture...
Posted by: rob wendell at December 19, 2005 02:58 PM
This is actually the second attempt to bring it public. Your article mirrors a post I put up last year on the first attempt.
Ain't nobody forgettin'! Just another year and another dollar for our illustrious tech markets.
Posted by: TechTrader at January 30, 2006 11:45 PM