Estate Sale Today
The assets of defunct dot-coms prove a treasure trove for others—but when loading up on technology and equipment, it’s buyer beware.
By Mary Wagner
Along with numerous others, web toy store ToyTime.com took a fatal hit in last year’s online marketplace. Closing down the shop last summer left the e-retailer loaded up with more than $11 million worth of Legos, Barbie dolls and board games. The company was circulating a massive list of available merchandise at a Las Vegas trade show when Overstock.com Inc. CEO Patrick Byrne bought it all for $3.7 million. The liquidator of surplus goods promptly pumped out a press release, just in time for Christmas shopping, that touted the bonanza of name brand toys now available online at up to 60% below retail prices. On that turnaround - as on most of its transactions — Overstock scooped up a margin of about 20%.
Byrne created his 2-year-old company to help manufacturers deal with surplus merchandise, but it’s enjoyed a shot in the arm from the liquidation of failed e-retailers. Over the past six to nine months, they’ve come to be the source of 15% to 20% of Overstock.com’s inventory.
And Overstock isn’t the only one to sniff out opportunity in a wave of capsized dot-coms. Other companies like SmartBargains.com and Bid4Assets Inc. have jumped into the ring, scouring the e-retail landscape for soon to be defunct dot-coms who may just need to unload merchandise and equipment from high-rent offices and warehouses in a hurry. For even after companies no longer have customers, they still have plenty to sell. And it’s not just inventory: URLs, customer lists, computer equipment, office furniture and other goods ranging from foosball tables to intellectual property all have secondary market value.
While some may see something vulture-like in picking off the assets of retailers who have gone kaput, dealers in secondary-market goods say they help troubled companies make the best of a bad situation, and recover more from their remaining assets. And, just as the Internet has affected every other area of retailing, it has affected liquidation of bust companies. For one thing, the Internet provides a direct-to-consumer market for operations like Overstock.com, meaning, Byrne says, that the company can pay more for liquidated goods than others who have to pass the merchandise on to re-sellers who all have to add their markups. For another, technology in the form of web auctions that allow potential buyers to bid on merchandise without being on-site has broadened the market for bidders at liquidations, bringing in more potential buyers than bankrupt companies could have expected in the past. “The Internet has allowed them all to recoup more of their investment.” says Jared Blank, a Jupiter Media Metrix analyst. “You can aggregate a greater number of buyers online, and when you do that, you get a better price.”
Each liquidator has different ways of going about its business. Some, such as Overstock, have retail operations themselves. Some are willing to sell everything for the failed company, from merchandise still in stock to computer infrastructure. Others draw a line between capital assets and inventory, operating in one market or the other. Still others specialize in very specific segments of corporate remains, such as URLs. Any way you look at it, though, bone picking already was big business in the offline world. The recent run of dot-com blowouts-493 since January 2000 according to webmergers.com, of which 232 were e-commerce sites—has simply ratcheted up existing secondary-market activity.
ForSale.com
URLs bring something new to the clearance goods table; they’re an asset that didn’t even exist before the rise of the Internet marketplace. URLs that describe popular product categories sold on the web have the power to drive traffic directly to a site. And if you’re a retailer in the same line of business, acquiring the URL of a fallen competitor can drive that site’s traffic to you. It’s not so surprising that bricks-and-mortar chain PetSmart Inc. grabbed Pets.com’s name when the online pet store tanked last year, or that cosmetics retailer Sephora.com acquired the rights to the URL of former competitor Eve.com, which had created brand awareness with a mass marketing campaign.
Sometimes, an in-demand URL can be as valuable as any high-priced server or luxury merchandise. When online drugstore PlanetRx.com Inc. exited retail this spring, it announced plans to transform itself into an online pharmacy for high-tech and specialty pharmaceuticals. But it eventually shut down altogether—just maybe, because the prospective income from the sale of 30 URLs in its possession looked like a better deal than the expense of building out a new business. The company had registered but not used URLs based on common diseases and medical conditions, such as acne.com, diabetes.com, and AIDS.com. PlanetRx chose secondary market URL broker GreatDomains.com Inc., a VeriSign Inc. subsidiary, to act as its broker. Great-
Domains already has sold half of the domain names including URLs such as acne.com, cholesterol.com, depression.com and hypertension.com, at prices ranging from $100,000 to $300,000.
“These names are extremely valuable,” says Steve Newman, director, secondary market, at GreatDomains. “Any name that represents the best possible generic name in an industry is going to be worth a lot of money.” That’s why The Bank of America paid $3 million last year for the domain name Loans.com.
But those aren’t typical prices. Typical prices are lower by order of magnitude, priced at perhaps thousands of dollars rather than hundreds of thousands. Of the companies that do fail, “Many contact us and we wind up relisting the names,” Newman says. But with listings of 30 million names, failed dot-coms represent a tiny portion of GreatDomains’ business.
Nevertheless, GreatDomains has developed a proprietary model for figuring out what a URL is likely to fetch in the market. Newman says the formula is based on the number of characters—the shorter the better—and whether the name relates to commerce, and if so, the size of the related industry. Also factored into a URL’s value are whether it’s a dot-com extension, which commands higher prices, and the comparable value of similar domain names.
You don’t have to be out
But it’s not just failed dot-com retailers who are flooding goods into the liquidators’ bargain web sites; downsizing dot-coms are doing so also. Daphne Li, vice president of marketing and technology for b2b auctioneer DoveBid Inc. notes that the company’s dot-com clients are a mix of those who’ve ceased operations and others seeking to unload surplus equipment and infrastructure as they downsize. “Most of these dot-coms were growing really fast, so they may have cut back on their hiring targets, but they’ve already bought the equipment,” she says. “Or they may be right-sizing the company and now they’ve got extra desks, chairs and PCs. They’re trying to improve their return on assets, so any surplus they have, they want to sell. But it doesn’t make sense to hold your own auction if you only have 20 computers.”
Make me an offer¯online
DoveBid has been around since 1937. It doesn’t deal with surplus inventory, but focuses on the secondary market for capital assets, mostly at Fortune 4000 manufacturers and other companies. DoveBid did its first liquidation of a dot-com company in 1999. Since then, it’s handled hundreds of such liquidations, which now represent about 10% of the company’s business, Li estimates. Among them are Petstore.com, Homegrocer.com, and Internet delivery service Kozmo.com
To handle growing demand, DoveBid has started aggregating dot-com asset liquidations in monthly auctions. The first so-called dot-com exchange, held in April, offered computer, networking and telecom equipment and office furniture from 40 dot-coms. Bidders can attend auctions on site or via webcast. Patent-pending technology developed by DoveBid lets remote bidders place bids in real time. The webcasts, says Li, have quadrupled auction attendance, to the seller’s advantage.
“Traditionally, a lot of people went to brokers to sell surplus,” she says. “But that doesn’t get a lot of competitive bidding going. Auctions are a way to reach more buyers and get some competition going. And the webcasts have really opened up the marketplace.” DoveBid collects both a buyer’s premium of 10% on each item for onsite bidders (12% for webcast bidders), and a seller’s commission that varies but often falls in the range of 5% to 10%.
Overstock.com is building its own warehouse to handle collection and distribution logistics. When dot-coms started crashing last fall, the company already had the infrastructure in place to leverage the opportunity. Supply is key to keeping Overstock’s b2c retail web site replenished, and Byrne keeps a close eye on the financials of wobbly e-retailers. “I know the balance sheets of the publicly traded e-retailers probably as well as they do themselves,” he declares. The company has cooked up its own formula for predicting when teetering dot-coms will fall; so far, accurate to within roughly a month, he says.
Overstock has acquired and liquidated online the inventory of 15 failed e-retailers to date. They include a number of jewelry sites such as Miadora.-com and Adornis.com, plus baby gear retailer Babystripes.com. It bought $500,000 of chairs, tables and lamps from the now-shuttered online furniture retailer GoodHome.com for a mere $80,000; and it paid collapsed hat vendor eHats.com $70,000 for $550,000 in Stetsons and Kangols. Most of the other deals with e-retailers were struck on condition of anonymity. “We buy at retail less 80%, and we sell at retail less about 60%,” he says.
Reducing the chain
Byrne says that selling liquidated merchandise directly to consumers allows Overstock.com to pay higher prices for merchandise. While paying $80,000 on $500,000 may not sound like much, Byrne says he pays higher than the rates paid by many other liquidators. “Unlike other liquidators who pass it down the line to jobbers and wholesalers, each with their own mark-up, we can afford to pay more because we sell right to the consumer,” he says. The company, which recently launched a b2b site, doesn’t stop at inventory. From Toytime.com, it bought computer equipment, desks, and warehouse infrastructure, conveyer belts and racks—even cases of toilet paper and brooms. In fact, Byrne says the company has upgraded its own infrastructure with capital assets it’s acquired in liquidations.
Buying needed technology and infrastructure of the down and out may seem like an appealing, low-cost idea to the up and coming. But it’s not without risk, says Jupiter Media Metrix analyst Heather Dougherty; in fact, it may be less expensive to build new applications from scratch than to retrofit applications that were intended for other uses. Applications that require integration with more than two or three data sources are probably too costly to integrate with existing infrastructure and business processes, she says. Walmart.com was forced to spend an entire month offline last fall while it integrated assets acquired from HomeWarehouse.com, she points out, which didn’t help either sales or the brand’s presence online.
“Enterprising traditional companies are strengthening or creating online retailing initiatives by purchasing the assets of unsuccessful online ventures,” she says. “Buyers must examine assets cautiously, including technology and infrastructure, inventory, and marketing, to determine which components they can salvage for reuse.”
The market for dot-com leftovers may be slowing down now. Even though 55% of the 493 dot-com crashes since January 2000 occurred in the first five months of 2001, according to webmergers.com, two-thirds of web M&A advisers expect greater buying activity in the second half of this year. And in May, the prices paid for failed dot-coms also began moving north. But the reality of liquidation that the new breed of salvagers has brought to the market is permanent. And business cycles being what they are, they are certain to have plenty of opportunities to use those techniques in the future. l
mary@verticalwebmedia.com
