IPO Reporter
July 31, 2000

CarsDirect.com Travels A Lonely Road To IPO.(Brief Article)
Author/s: Colleen O'Connor

Businesses promising to usher in a new era in the way consumer purchases are conducted, (a.k.a. the dotcom), had Wall Street investors clamoring to grab a piece of the IPO pie for the last year-and-a-half. Since the second quarter of 2000, however, dotcoms have barely been a blip on the radar screen, leaving some to ponder if the dynamic dotcom has gone the way of the dinosaurs.

In fact, according to Thomson Financial data, since the market correction in the second quarter, only 10 dotcom companies have priced and there have been 23 so far this year. Compared with the 46 e-commerce and dotcom plays that priced in all of 1999, it appears The Street no longer is paved with lucrative opening share prices for these types of companies, looking to realize a windfall via initial public offerings.

Despite that, all indicators point to still high levels of investor interest in dotcoms that reach the IPO market. Companies like CarsDirect.com, set to price this week, may find it advantageous to be one of the few dotcoms still willing to take the IPO plunge. The $172.5 million offering is underwritten by Merrill Lynch & Co., Chase H&Q, Robertson, Stephens & Co. and E*OFFERING Corp.

"We realize it's a more selective market, but deals are getting done," said one banker close to the deal. He went on to state that bankers do not believe dotcom IPOs are doomed from the start. "Investors now have a fairly selective appetite, but there is still much interest here," he said. "The road show [for CarsDirect.com] was still full of a lot of investor interest."

Offering customers everything short of an actual test drive, CarsDirect.com (proposed NNM:CRSD) aims to bring full circle, a haggle-free experience to consumers shopping for automobiles. With just a few clicks of the mouse, the site offers vehicles priced on recent local averages and financing through Bank One. The company began selling cars in late 1998 and through an alliance with Autoweb.com, 2,500 local dealers have been recruited into its nationwide network. idealab! currently owns 50% of CarsDirect.com, which plans to offer auto insurance as well in coming months. With CarsDirect.com set to price, it will join Sohu.com (NNM:SOHU) as the only dotcoms to have debuted so far in the third quarter. Compared to the start of the third quarter of 1999, when five dotcoms priced in July, including MP3.com (NNM:MPPP) and Drugstore.com (NNM:DSCM), CarsDirect.com is unlikely to see any of the lofty first day surges that its predecessors once enjoyed.

"The value of Internet companies is now being driven by both the public and private markets," said Jeff Anderson, a principal at Bond & Pecaro. The firm, which has been providing valuation and financial consulting services in the communications industry, recently turned its attention to the Internet sector with the publishing of CyberValuation, one of the few data driven publications that analyzes the landscape of Internet-related businesses.

"The public markets had been setting the tone for valuation of these companies, but since the pullback, the private markets have followed through with financing from VC capital and angel investing," said Anderson. "People have become cautious again, and now valuation is getting the due diligence it deserves."

If the calming of the IPO market last quarter has led many investors to take a second look at what they're sinking their dollars into, some marketwatchers think investors have encountered a justification quandary.

"For the last year or so, there was a temporary abandonment of old school brick-and-mortar tools for valuation, and the floodgates were opened," said one Internet analyst at Morgan Stanley Dean Witter. "It was a matter of following the herd. This year, the market correction has revealed many companies had highly inflated valuation without just cause, which essentially ended the herd mentality. Now, most of these Internet companies have nothing on their books to show. They're new companies with no revenue and I think many investors may be stuck as to what indicators to look at."

Much like the cable and cellular companies, which emerged on the scene in the 1980s, Bond & Pecaro's Anderson said Internet companies are likely to mature in a similar fashion.

"With cable and cellular companies, people used measures such as number of subscribers, the areas covered and the population per area," Anderson said. "They only become profitable as they build out." The development of the five-step cycle Bond & Pecaro uses for assessing the value of Internet companies is based on the company's life cycle, said Anderson. A company in its start-up phase should be valued by cost and market. At the pre-IPO and public stages, a company's valuation should involve the factors of income, market and comparable sales.

Should investors become keener as to how they size up a compan? With 46 dotcoms still in registration, according to Thomson Financial data, there will be no short supply from which to choose. Companies still waiting in the wings include a $115 million offering from PETsMart.com (proposed NNM: PSCM) and a $138 million deal from LowestFare.com (proposed NNM: FARE), to name a few.

"Valuation may have gotten ahead of itself, but there is still tremendous growth left. The Internet is an area that is still underdeveloped," Anderson said.