Dotcoms: the beginning of the end?

The collapse of dotcom companies such as Boo.com and Netimperative has seen the share price of technology companies tumble over the last few weeks, and led to delayed stock market flotations as fear and uncertainty sweep the sector.

Techmark, the London Stock Exchange's (LSE's) hi-tech index, is continuing to flounder, while its German counterpart, the Neuer Markt, has also dipped after several initial public offerings (IPOs), including that of software developer Blaxxun Interactive, were pulled.

Further afield, Vodafone AirTouch announced this week that it would not launch a proposed IPO of its Australian subsidiary, Vodafone Pacific, due to "volatility in the global equity markets in general and the telecommunications and media sectors in particular".

At home, however, it looks as though anyone hoping to raise money when the market settles down could be in for a long wait. The FTSE 250 and Techmark are continuing to fall sharply as some of the larger and more established technology stocks crumble along with the startups.

It appears that fall-out from the collapse of business to consumer (B2C) ecommerce dotcoms is now having a destructive effect on the fundraising capabilities of companies playing in the business to business (B2B) space, even though these were once seen as more palatable investments.

The misfortunes of internet sportswear website Boo.com and web-based news service Netimperative, which have both started liquidation proceedings, has ignited a trail of falling technology stock market valuations and heightened the City's mistrust of the entire sector. Both, it seems, have yet to find a suitable buyer.

B2B company Telecity, which provides internet companies with facilities for the secure housing of internet networking equipment, has also became a high profile casualty. It cancelled its proposed flotation on the LSE earlier this week, but if it had pursued the listing, under normal market conditions its estimated value would have been about £700m or more.

George O'Connor, an analyst at stockbrokers, Capel Cure Sharpe, predicted that more companies providing enabling technology, once thought to be the next high growth stock in the IT sector, would also be hit "because of the disquiet surrounding the sector".

Bad feeling
At the other end of the market, smaller consumer oriented companies are likewise struggling against a wave of bad feeling towards the industry. Software and games e-tailer SoftwareFirst was another UK company that was forced to pull its proposed listing on Ofex this week. It had hoped to raise £1.5m, but is hoping to carry on at a later stage.

Brett Miller, a consultant at Ruegg & Co, SoftwareFirst's corporate adviser, said poor sentiment was badly affecting the ability of most companies to raise funding. "It's more difficult than getting a nun into bed," he said, but stressed it would not affect the future of SoftwareFirst.

He added that the company was still strongly supported by its shareholders. "It's not a startup with a high burn rate, it's a growing company with good cash flow," he said.

With the already cynical attitude towards technology stocks deepening, however, industry analysts agree that many will be unable to stand on their own two feet for much longer.

A report issued earlier this month by Gartner said that the research company expected a raft of traditional companies to buy in, rather than build their own, internet infrastructures.

And with many technology stocks seeing their valuations rapidly diminish, traditional companies will be on the look out for a bargain. In their vulnerable state, internet startups are more likely than ever to succumb to 'bricks and mortar' sugar daddies with deep pockets.

This would appear to be bad news for the dotcom sector in the long run as such companies are fundamentally different to most old economy companies in terms of culture and management style.

But according to Gartner, the businesses that are able to survive over the next 12 months of forecast consolidation may find that such 'technology and tradition' deals will eventually free up money that businesses are currently holding on to until the market settles down. Such organisations are waiting to invest in high quality, well managed and fast growing standalone companies, it said.

The old and the new
Analysts PricewaterhouseCoopers agreed that the way forward will be through internet tie ups with old economy stocks, but said the dotcoms have very little time left. A quarter of them will run out of cash within just six months, it said.

These companies will have little choice but to merge or sell their businesses unless there is a drastic turnaround before then. Cutting costs is not a realistic option for many as they need huge marketing budgets to withstand growing competition.

And indeed, the sector is starting to consolidate already. Over the past week, web based auction house QXL has succumbed to a merger with its German counterpart ricardo.de, for example, while oil and gas group Aminex has formed a joint venture with privately owned ecommerce services business ci4net.com to develop a B2B ecommerce site.

While the dotcom catastrophe has highlighted the need for stronger financial controls within these businesses, there is no doubt that the internet itself still represents a sensible way forward, however.

Tesco's decision this week to close several of its Metro stores due to high rents in town centres, shows that e-tailing may still provide retailers with an alternative sales channel to traditional high street shops and other more traditional business structures.

And some dotcoms are still managing to hold their own. Hot on the heels of Lastminute.com, Online Travel has now issued details of its float plans, while internet bank Egg is also sticking to its listing strategy. On balance, however, analysts agree that things are likely to get worse before they get better, and the City should steel itself for more shocks into at least the medium term.