Wave of High-Tech Failures Could Become Deluge

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Friday August 24 2:57 PM ET

Wave of High-Tech Failures Could Become Deluge By Andrea Orr

PALO ALTO, Calif. (Reuters) - The dot-com storm isn't over. Even after waves of dot-com failures have washed ashore in recent months, many other struggling companies are heading toward the rocks.

For every company like the Internet grocer Webvan Group Inc. (Nasdaq:WBVN - news) that called it quits this summer, there remain others such as software maker NetObjects Inc.(Nasdaq:NETO - news), that are fast running out of cash, and options.

NetObjects, which makes software for building Web sites and was to have been a big hit in a wired world, last week warned it had only enough money to last through Sept. 30. The company is still searching for ways to stay in business, but its 35 cent share price shows how much faith investors have put in its prospects.

In fact, a recent count based on Reuters data turned up some 482 U.S. companies, including 24/7 Media Inc. (Nasdaq:TFSM - news), Critical Path Inc.(Nasdaq:CPTH - news) and Netcentives Inc.(Nasdaq:NCNT - news), whose stocks are below $1 a share. Many of them are technology companies. Such a depressed stock price does not always mean imminent death but often tends to signal a predicament too deep to dig out of.

Think it was a rough summer in the technology industry? Just wait until the fall.

``There are going to be a lot more companies failing,'' said Greg Roston, deputy director of the Institute for Economic Policy Research at Stanford University. ``There are a lot of money-losing companies that had said they were fully funded for a year, and now that year is coming to a close.''

PUTTING PROFIT ON A DISTANT HORIZON

While the bust that began in the dot-com sector more than a year ago continues to strike consumer Internet companies, it is also spreading to other areas of technology from software to telecom.

The demise of these companies tends to follow a pretty standard script. Their losses mount as they discover they had mistakenly counted on a robust economy and lavish consumer spending continuing forever.

Now that everyone has cut back, these businesses have to put profitability on a more distant horizon, and they have to find more cash to bridge the gap.

While some will find a way to make it through the downturn, all forecasts are that the majority of them cannot be saved.

Consider the financial condition of a few of the businesses that have survived to date, but which now trade at barely $1, or even lower:

-- ExciteAtHome Corp.(Nasdaq:ATHM - news), whose money losing Internet content and access business has close to $1 billion in debt, stunned investors last month when it said it had already burned through most of the $185 million in emergency financing which was supposed to carry it well beyond this year. With a stock at risk of being delisted and no sign of its losses abating, auditors say its future is in doubt.

-- Drugstore.com Inc.(Nasdaq:DSCM - news) won a quick and decisive victory over now-defunct rival PlanetRx (PLRX.OB), but it is still not expecting to turn a profit until the year 2004. A problem, since it is due to run out of money next year.

-- Ask Jeeves Inc.(Nasdaq:ASKJ - news) lost more than $20 million from its Internet search business in the latest quarter, and withdrew an earlier forecast to turn a profit by the end of this year, with revenue below expectations. One of the biggest gaining IPOs of 1998, Ask Jeeves stock has crashed from an all-time high of $169 to just over $1 a share this week.

-- Critical Path Inc.(CPTH.O), which makes software to support corporate email systems, suffered declining revenue and an $81 million net loss in its latest quarter. The company is trying to stretch out its limited cash by slashing jobs and consolidating offices.

-- Globalstar Telecommunications Ltd (Nasdaq:GSTRF - news), the mobile satellite telephone company, is on the brink of bankruptcy. After cutting half its staff this month, it said it could make its cash last the rest of the year, but probably not much longer.

SILENCE FROM WALL STREET

What does Wall Street have to say about these companies' prospects?

Not much.

In an insult worse than harsh criticism, financial analysts are simply ignoring the same stocks that were on the top of many brokers' recommended lists.

Critical Path, which a year ago was trading at $79 a share and had 17 analysts covering it, now is worth just 38 cents a share and is followed by just three analysts. The group of analysts covering Globalstar has dwindled from 10 a year ago to three today.

Conference calls to discuss financial results, which used to be chummy back-slapping sessions between management and Wall Street, have turned into somber and quiet events where it is sometimes hard to tell if anyone has dialed in.

The volumes of companies still struggling to survive is especially striking considering how many have already failed. So far this year, some 377 stocks have been delisted from U.S. exchanges for failing to meet minimal financial requirements, according to a count based on data from the exchanges. That already tops the than the 337 that were delisted in all of 2000 -- also a difficult year that marked the start of the dot-com bust.

By another measure, corporate bankruptcies are on track to beat last year's record level. So far, some 127 publicly traded companies have filed for Chapter 11 bankruptcy protection, vs. 176 for all of last year, said George Putnam, publisher of The Turnaround Letter, a newsletter that looks at investment opportunities in distressed companies.

``Do we expect more bankruptcies? Yes,'' said George Putnam, publisher of The Turnaround Letter, who figures things will get somewhat worse before they get better. ``I'd say we are nearing the peak, but I don't know if it will be this year or next.''

STEELY RESOLVE

What all these bleak numbers do not always capture is the steely resolve of some companies to make things work. Among those that are no ready to give up the fight, is Exodus Communications Inc.(Nasdaq:EXDS - news) the struggling provider of Web hosting facilities, which is expected to be almost out of money by year end.

After drifting below $1 a share earlier in the summer, the stock enjoyed a relatively strong burst as investors speculated that a business with more than $300 million in quarterly revenues and extensive physical assets that are critical to the digital economy, was bound to find a savior.

Perhaps. Then again, others believe that today's tough economy is nothing compared to what will happen in the fall, when consumers really start to feel squeezed by the recession and curtail discretionary spending even further.

David Tice, a portfolio manager who has for years been forecasting a long and deep recession, sees a high-tech industry that is swimming in excess capacity. In just one dire sign he offers, Tice estimates that only about 390 million of the 650 million to 700 million cell phone handsets on the market this year will sell.

``There's much worse to come,'' said Tice. ``It starts to build on itself as more people get laid off, and it goes into a downward spiral.''

http://dailynews.yahoo.com/htx/nm/20010824/tc/tech_survivors_dc_1.html

-- Martin Thompson (mthom1927@aol.com), August 24, 2001

Answers

Talk about mixed signals. I just read where the VC's --Venture Capitalists--on both coasts were gearing up, ready to start investing in hi-tech start-ups again.

Who's right? What's really going on here?

-- Uncle Fred (dogboy45@bigfoot.com), August 25, 2001.


I would bet on a shrper down turn yet. I see no light at the end of the tunnel. I am only surprised that there are still enough optimists out there to bid up the NASDAQ more than 60 points, and the Dow nearly 200, as today.

-- Wayward (wayward@webtv.net), August 25, 2001.

When major NASDAQ-listed stocks sink below $1 in value, look out. These are worse that the worst junk bonds. Nobody gets rich investing in penny stocks.

-- Big Cheese (bigcheese@multimax.net), August 25, 2001.

Spillover time should just about be here. Bull markets die hard, just as bear markets. For some reason people just do not want to believe in change of direction. As for now, after ten years of market boom, that's why you see such vibrant bounces upward on just glimmers of good news. I've seen the reports, too, that the venture capitalists were getting ready to start pouring out money again, but think this is largely a puff piece, planted by someone with a vested interest in getting high tech stock prices back up again. Nothing more than that.

-- Wellesley (Wellesley@freeport.net), August 25, 2001.

What do you mean by spillover?

-- Loner (loner@bigfoot.com), August 25, 2001.


I can't believe there hasn't been a bank run, somewhere in the world yet. How far does the world economy have to deteriorate before this happens? The bursting of the hi-tech bubble certainly must have given the world a push in this direction by now.

-- QMan (qman@c-zone.net), August 25, 2001.

I have a niece whose husband started with a little, new technology firm in 1996. They gave him a huge number of stock options, at something like a dime a share. In 1998 they went public, and in 1999, when their stock hit eighty dollars a share, he could have cashed out and sold the stock and made about five million dollars. He didn't, and now the company is out of business, and he is out of a job. What would you call this? A rags to riches to rags story?

-- LillyLP (lillyLP@aol.com), August 25, 2001.

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