Tech Survivors Can’t Shake Stigma From the Shakeout

Even with Wednesday’s run-up on Nasdaq, scores of notable technology stocks remain stuck at 90% below their record highs, including Amazon.com, Yahoo Inc. and JDS Uniphase.

A few months ago, some experts predicted that plummeting values would turn many once-mighty tech companies into irresistible acquisition fodder. The argument was that these firms maintained huge businesses that seemed likely to produce vast profits--someday--so why not buy them on the cheap?

But since the Sept. 11 terrorist attacks, most of the large troubled companies seem to have attracted few, if any, buyers.

“The way you realize [efficiencies] is layoffs,” said Robert Lawrence, an economist at Harvard University. Many companies are frantically downsizing their payrolls, he said, and buying another troubled firm that would require even more layoffs is something few managers want to face, he said.

The current paradox is that the less such companies cost, the less interested buyers seem to be.

Consider Web portal Yahoo. Last spring, industry insiders predicted that if Yahoo’s shares fell to $15, a large media company such as Viacom Inc. or Walt Disney Co. would snap up the Internet leader, with its more than 100 million regular users. Yahoo’s shares closed Wednesday at $9.91, giving it a total market value of about $6 billion. Still, the bigger fish have yet to bite.

They may be put off by Yahoo board members’ decision last year to thwart a hostile takeover. Knowledgeable sources said Yahoo’s new chief executive, Terry Semel, won’t shop the company until he can push up the stock substantially. And with Yahoo founders David Filo and Jerry Yang plus Softbank America Inc. owning more than one-third of the company, their blessing could be essential for any takeover.

Meanwhile, advertising-dependent Yahoo may not return to profitability any time soon, said Safa Rashtchy, an analyst with US Bancorp Piper Jaffray. That makes a Yahoo bid harder to justify to shareholders of large media companies that also are suffering from an ad slowdown.

E-tail giant Amazon.com is in an even more precarious situation.

Less than two years ago, Amazon’s market capitalization was about $35 billion. Retailers, from Kmart Corp. and Wal-Mart Stores Inc. on down to small neighborhood bookstores, worried that Amazon, which brashly proclaimed its desire to be the world’s biggest store, would destroy their way of doing business. Now Amazon is fighting for its life, and its market value has declined to about $2.5 billion. Amazon’s stock closed Wednesday at $6.76. But even that seemingly bargain-basement price has drawn virtually no interest, analysts say.

Although Amazon boasts undeniable attributes, including a well-known brand and 20 million customers, six years of losing money have a way of destroying illusions.

“There are no merchants big enough in the book industry or in the broader retail industry that would need to buy the company,” said Michael Perkins, coauthor of “The Internet Bubble,” which analyzed the retailer.

One credible suitor might be Bertelsmann, which owns major American publishers and might benefit from operating Amazon’s formidable distribution pipeline as well.

“The question for Bertelsmann would be whether they’d want to take on all of Amazon’s debt--$2 billion by the end of 2000 and $130 million in annual interest payments. . . . Or build up its own e-commerce infrastructure the way Wal-Mart has,” Perkins said.

If Amazon runs out of operating capital and is forced to file for bankruptcy protection--something analysts say is possible in a lengthy recession--Bertelsmann or anyone else could buy the carcass without assuming the debt.

Even then, it’s unclear how much assets like Amazon’s customer list or brand name would be worth. “Dot-com brands have been shown to have no inherent value,” said Jim Crawford, an analyst with Forrester Research. “At least, they don’t in the absence of a profitable business model.”

Several other tech categories are littered with once-prominent companies now being forced out of business.

Excite@Home--which built the largest subscriber base for broadband Internet access and operates one of the most visited sites on the Web--filed for bankruptcy last week. Excite@Home’s complex partnerships and ownership stakes by AT&T; Corp. and cable giants reduced the likelihood of an acquisition by an outsider. But the failure of a company that was recently viewed as an industry leader suggests how high the bar has risen for major Internet acquisitions.

Similarly, telecommunications stocks continue to be decimated. Yet few big names are being snapped up by stronger competitors, who lack the cash or stock muscle to finance acquisitions.

“There may be a Lexus available for $20,000, but you still can’t buy it if you don’t have $20,000,” said John Gonsalves, vice president at Adventis, a Boston-based telecom consulting firm.

Many seemingly obvious takeover targets also carry crippling debt. That’s why Web-hosting firm Exodus Communications, and network operators Rhythms NetConnections and 360 Networks were forced into bankruptcy recently despite their valuable assets.

Regulatory restrictions also have inhibited telecom mergers. Regional phone companies are effectively barred from buying one of the big long-distance or data players until they win federal approval to enter the long-distance business in their home markets.

The telecom landscape is not bereft of deal-making. Alltel Corp., an Arkansas-based local-exchange and long-distance carrier, is making a run at rival CenturyTel Inc., offering about $9 billion in August, including the assumption of debt. And network-equipment leader Cisco Systems Inc. is eyeing competitor Ciena Corp., said Michael Murphy, editor of the California Technology Stock Letter. Such a purchase would run more than $4 billion at Ciena’s current value.

But in rapidly contracting industries, multibillion-dollar deals remain extremely risky, experts say. Investors have savaged the stocks of Compaq Computer Corp. and Hewlett-Packard Co. since their merger was announced Sept. 4.

Still, the tech industry is consolidating in smaller steps. During the last quarter, some 300 Web-based businesses merged or were acquired (including sales of assets of 30 bankrupt firms), according to research firm Webmergers.com. The average deal size was a mere $25 million--with only four deals above $250 million.

But if the economy moves into recession, as is widely anticipated, experts expect a raft of failures among companies who won’t find a white knight--particularly firms whose chief asset is their employees.

“The biggest problem with these kinds of companies is that intellectual value walks out the door every day,” said David Yoffie, professor of business administration at Harvard. “They are only bargains if you can keep the people and integrate them quickly.”