The White Knight

Companies searching for eleventh hour assistance.

By Adam Ismail

As Internet health companies fall one by one, their big focus—rather than on their core business—has been on finding white knights who will invest in the company in the eleventh hour. These companies obviously cannot afford to focus on the core business because they need the cash to operate, but a recent report by Goldman Sachs showed that consumer health and wellness Internet companies are now losing customers by 8% annually. Hopefully, all of these companies will close their funding rounds soon, but in the meantime many investors are questioning whether the management teams are right for the job. After all, the previous valuation metric was not profitability, it was revenue. Can a management team focused on increasing revenues, no matter what the cost, transform itself to focus on profits, no matter what the revenues?

At drkoop.com, a company that gained notoriety in the beginning from its famous namesake, the former surgeon general C. Everett Koop, an entire overhaul was recently launched. The company came under pressure very quickly when it became apparent that key management members sold their stock prior to the end of the IPO lockout period. Since that time it has been unable to get out of trouble; its auditors said the company did not have enough cash to operate, numerous shareholder lawsuits were filed, an inquiry was begun into the company by the SEC and it was the subject of two semi-serious takeover opportunities.

The company finally seems to be on better footing. Its current investors just pumped $27.5 million into the company, fired a third of the staff and replaced the management team that had been in charge during the turmoil. The goal is to cut operating expenditures by two-thirds to a point where it can turn a profit and that means more layoffs. In an information company, which acquires its content through alliances, it does not make sense to have so many employees. One of the key observations of whether a management team can make the transition from revenues to profits is how bareboned the companies make themselves. Many internet CEO’s consider their virtual companies pared down if they have a few hundred employees left. Does that seem incredible? These companies outsource everything; why do they need that many employees?

Drkoop.com’s new management team has been in place less than two weeks and it has already almost reached its cost cutting goals, which in part has been responsible for the company’s 100% increase in its stock price in under two weeks. The team has also shown that it is incredibly skilled at renegotiating the company’s costly alliances, having just expanded its alliance with Shared Medical, a division of Siemens AG. Going forward, that is going to be a vital metric for content companies, especially when you consider that many Internet alliances are with public companies that cannot take less money because they have public markets to answer to.

Also in our space, MotherNature.com recently received a takeover offer from Sitestar, an Internet holding company that has experience buying niche sector net companies. Is this the white knight they need? That remains to be seen, because as we go to press, little had been released about the offer, other than that it is for $0.75 per share. The company’s stock has fallen 95% off its high in the past year and that may be a welcome offer for its investors. Regardless of whether or not these are the people to help the company, most people don’t ex­pect the company to be independent in a year’s time. So as companies wait out the funding game, it is becoming increasingly important that management teams reinvent the ways they manage sustainable business models. If they do not, there is going to be increased consumer weakness in the space and who knows if there will be any online companies solely devoted to consumer health left.

NW

Adam Ismail is a financial analyst with Health Business Partners (HBP),Warwick, RI) a boutique investment bank that works exclusively with companies in the natural products and complementary health services industries. HBP also provides capital to businesses in these industries as well as tracking financial data in the natural products industry and providing M&A and strategic advice, in addition to direct investments. HBP can be reached at 5784 Post Road, Warwick, RI 02818; 401-885-4670, Fax: 401-885-4686; E-mail: [email protected]; Website: www.healthbusiness.com.