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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.''
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