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In early May, online insurance services company Quotesmith.com Inc. completed the $18.4 million acquisition of a telephone-based insurance operation called Life Quotes Inc. To finance the acquisition, publicly traded Quotesmith.com sold $13 million of shares to Zions Bancorp. As deals go, this one was modest. But it represented a milestone for Quotesmith.com, based in Darien, Ill. Life Quotes was the first acquisition of any size. It allows Quotesmith.com to expand offline the way it sells its insurance. “We found we had a big hole in the business model, and this plugs it,” says Phillip Perillo, the company’s senior vice president and CFO. “I’m not sure [the capital] would have been there a couple years ago.” The next week, a distressed-debt fund paid $7.4 million to acquire the Internet assets of bankrupt toy retailer KB Toys Inc. This was a milestone of another sort. The new company is called eToys Direct Inc. It represents the latest incarnation of eToys. Once a huge name in online retailing, eToys became one of the first big e-commerce crashes. At the end of the month, Edgar Online Inc. completed an even more modest undertaking. The online financial information service raised $5.5 million in a secondary offering. Quotesmith.com, eToys and Edgar Online are all linked, and not just because they are Internet-based. They are part of the IPO class of 1999. This summer marks their fifth-year reunion. Conventional wisdom often portrays late ’90s Internet initial public offerings as a kind of massive rockets launch. According to this thinking, a handful of companies such as Amazon.com Inc. and eBay Inc. were moon shots, while the others exploded and vaporized shortly after takeoff. The reality is more complex. True, a good percentage of those companies that went public in the heat of the Internet moment have long since disappeared. Others, though, illustrate a much more nuanced fate. “We certainly didn’t disintegrate, and we certainly didn’t shoot to the moon,” says Stephen Greenberg, the CEO of Net2Phone Inc., which went public five years ago this month. But “we’ve turned around our core business, and we’ve gone from losing $70 million a year until now we’re cash-flow-positive.” For those companies that hunkered down and hung on, a strong survival ethos comes shining through. “You went to the storm cellar and waited until it’s over,” says Michael Baum, president of online art purveyor Guild.com and the former CEO of education software developer and marketer Renaissance Learning Inc. “Of course, many didn’t emerge from the storm cellar.” Those that did make it can rightly hold their heads high, say those that follow the industry. “For those who have gone public and survived, it’s usually a testament to management that they didn’t get swept up in the hysteria. They spent their money more wisely,” says Rick Bruner, president of New York-based Executive Summary Consulting Inc., an Internet-focused consulting firm and research group. “There were also elements of luck, determination and stick-to-it-ive-ness.” As eToys demonstrates, even some of those companies that went bust are hanging around in one form or other. There are a few indications as well that the heady days are creeping back, although most executives swear they’re not about to repeat the mistakes of the past. In March, another member of the class of 1999 spun some of that old-time Internet gold. Ask Jeeves Inc. offered cash and shares for privately held Interactive Search Holdings Inc., which owns such popular Web properties as iWon, My Search and Excite. It came as market excitement began to grow over the IPO of Ask Jeeves competitor Google Inc. It also was an unabashed move for more eyeballs. “Our strategy has always been to grow market share, and this doubles our share in search,” Ask Jeeves CEO Steve Berkowitz told The Deal in May. Wall Street was dazzled and bid up the value of Ask Jeeves shares. By the time it closed in May, the deal was worth $500 million. Dozens of Internet-related companies went public around the summer of 1999. In June alone, there were 29 Internet-related IPOs; 11 came to market in the week preceding the July 4 break. These included everything from Calico Commerce Inc., a now-defunct developer of e-commerce software that went bankrupt last year, to Commerce One Inc., a once-highflying, business-to-business software services company that has managed to hold on despite multiple reorganizations and downsizing that began in 2001. While it would be some months before investors could bet on an online pet food emporium (Pets.com) or a billion-dollar grocery delivery system (WebVan Group Inc.), the lunacy of new-economy economics had definitely set in by the summer of 1999. “We were all drinking funny water,” recalls Toni Sikes, the CEO of Guild.com, whose company would briefly merge with Ashford.com, another summer of 1999 IPO. That summer gave the market some of the more loopy companies of the Internet era. NetZero Inc., for example, offered free Internet access and convinced investors it could make enough money through online advertising to support itself. It couldn’t. The summer also produced some newly minted public companies that engendered fierce investor loyalty and an unbridled exuberance far disproportionate to the company’s ability to perform. The most visible promoter of the open-source Linux operating system, Red Hat Inc., became the techie’s IPO of choice. But it’s taken the better part of five years for revenue and profitability to match those early expectations. An unscientific examination of a dozen mid-1999 IPOs picked at random illustrates a range of outcomes. Four either went bankrupt or ceased operations. In addition to eToys, that list of unfortunates includes Mortgage.com, Musicmaker.com and BigStar Entertainment. (Extending the summer of 1999 survey beyond these 12 produces several more well-known disasters including Garden.com, Drkoop.com and iXL Enterprises.) Two were acquired: Expedia Inc. bought another travel site, Travelscape.com, in 2000. Vivendi Universal SA bought music download site MP3.com in 2001, then resold it to CNET Networks Inc. in 2003, which has turned it into an information address. Ask Jeeves was an early investor favorite, skyrocketed to an absurdly high valuation toward the end of 1999, plummeted to earth in early 2001, barely floated for two years, then made a stunning comeback this year on the back of its Interactive Search Holdings acquisition. Online florist and gifts purveyor 1-800-Flowers.com Inc. bottomed out toward the end of 2000, has made two acquisitions since and, with more than $100 million in the bank, says it is looking for others. Late last month, investors knocked back the company after it warned soft sales of home and garden items would affect revenue totals for the year ended June 27. The others have endured. E-Loan Inc., Quotesmith.com, Edgar Online and Net2Phone may be stolid, but they’re steady. As revenues have increased and profits have materialized, their shares have made modest gains. “We’re just plugging away,” Edgar Online CFO Greg Adams says. In retrospect, the summer of 1999 stands smack in the middle of the dot-com frenzy. At the time, however, there was some ambivalence about all the agitation, and a few commentators thought the glory days had ended. They referred to the previous year as a touchstone, when Internet-related IPOs would regularly triple in first-day trading and never look back. When Edgar Online began trading in June 1999, the shares barely moved. “An abysmal failure by dot-com standards,” one columnist huffed. Quotesmith.com and 1-800-Flowers.com were termed “big losers” by another columnist when they debuted a few weeks later. On July 1, 1999, Ask Jeeves came to the market. Its share price almost quadrupled the first day, giving the Internet search engine operator a $1.7 billion market cap on quarterly revenue of just over $1 million. That wasn’t considered an unhealthy aberration but a return to the good old days. It was a heady time. “I remember the day we went public — you couldn’t help getting caught up in the euphoria,” recalls William Shea, 1-800-Flowers.com’s CFO. “You’d scratch your head at night and say, ‘What is going on here?’ You’d never seen anything like it.” But Shea, like other survivor executives, maintains that tapping the public market for capital was a good move and, in retrospect, remains so. “Going public allowed us to raise money to invest back into this company, build a dream, gain some cover,” he says. “We’re a much better company for going public. We built a solid business plan and stayed the course.” But the market mania, which would continue for the better part of another year, not only devastated investors, it ultimately damaged or destroyed many Internet-related companies, caught in a cycle of easy money and big spending. “Everything was based on growth at any cost,” Sikes says. “It didn’t matter how much you spent as long as you gained a share of the market.” Companies felt they were constantly under siege. “There was a sense of paranoia, that some competitor was going to raise $100 million … or some company would suddenly come out of nowhere with a huge marketing budget,” says Chris Larsen, the chairman and CEO of E-Loan. “There was a sense if you weren’t sprinting with everyone else, you would lose it and lose it for good.” A spend-it-now mentality was linked to the belief in the need for instantaneous results. “It was much harder to get people to focus on what you need to do to get the pieces in place for a five- or ten-year window,” Larsen says. “There was a certain amount of truth to the myth that companies used this artificial sense of the future to fund swanky offices, office parties and Super Bowl ads,” Executive Summary Consulting’s Bruner says. Lack of fiscal restraint stemmed from an expectation of nearly unlimited capital. “There was a disconnect between the money being spent and how it was being raised,” Bruner says. “The companies that are still around figured out that money in the bank was a critical part of the equation.” When funding suddenly dried up, many companies had no reserve. “They weren’t able to sustain themselves when they ran out of capital,” Quotesmith.com’s Perillo says. Although Quotesmith.com spent heavily in relative terms on marketing, the company caught itself in time, Perillo says. “It had plenty of cash to fund its operation,” he says. The ability to survive the lean times is a theme that runs through discussions with a number of company executives. Take Edgar Online, which provides investors and other interested parties with access to SEC documents. Adams talks unabashedly about the decision to go public. “We were a company with $2 million in revenue getting a $100 million valuation,” he says. “We took advantage of ridiculous valuations and raised capital.” But Adams says he refused to get carried away. “There was euphoria all around,” he says, “but everyone knew the [capital markets] window would close. I remember sitting down with CFO friends around this time in 1999, and we all pretty much assumed it would drop soon.” While Edgar Online tested the waters in television advertising, it quickly pulled back, Adams says. Instead, Edgar Online used some of its capital to acquire technology and build its infrastructure. Even then, Adams says, he made sure his company had a cushion in the bank of at least six months’ cash flow. “We were able to pace our spending with the growth of our company,” Adams says. Adams credits some of the restraint to a lack of venture capital investors. He and some other executives blame venture capitalists for pressuring companies to grow as quickly as possible. The ability to regain focus or stay focused is another constant in discussions with these Internet survivors. Mortgage.com, for example, started as a consumer real estate lending service, then switched to business-to-business when consumer-oriented operations lost favor and B2B was all the rage. It next tried its hand at peddling software when the B2B market collapsed. By October 2001, the company was out of business. “They were trying to keep analysts happy,” Larsen says of his now-defunct competitor, while E-Loan refused to budge from its focus on the consumer loan market. “Trying to switch business models in a couple quarters — it’s death.” As became evident after the bubble burst, a shotgun approach added top-line growth but wreaked havoc on the bottom line. When Wall Street decided profits were indeed important, many companies were caught out. “Everybody felt you had to be everywhere,” Net2phone’s Greenberg says. The result: “You were in an enormous amount of businesses with margins that made no sense. That had to change.” So Net2Phone, for example, is focused these days on selling its voice-over-Internet-protocol technology to cable companies. “We manage ourselves in a much more rational way,” Greenberg says. “We’re in business lines where margins are sensible, and we’re not trying to be all things to all people.” Not that this five-year retrospective means they ever lost faith in the Internet, executives say. “We’re well-positioned as a multichannel specialty retailer, using the Internet as our base,” 1-800-Flowers.com’s Shea says. The Internet is “our most important channel; it continues to be the driver of our growth.” As Shea reflects on his company’s five-year stock market ride, he promotes a sense of moderation. “There were high highs and low lows,” he says. “We’re recognizing we should be in the middle.” Copyright �2004 TDD, LLC. All rights reserved.

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