Our Tech Wreck

Monday 5th February 2001

In April last year Unlimited quoted US investment guru Tom Gardner: "90% of internet stocks are overvalued, and 10% are dramatically undervalued". Given that New Zealand then had fewer than 10 e-stocks, we predicted most would soon plunge or fail, and only one or two would do well.

Nearly a year later we've got more internet companies but, as it turns out, our predictions weren't far wrong. New Zealand's recent tech wreck - we lagged behind the US in both joining the dot-com party and suffering the hangover - has seen very few winners but quite a few strugglers.

Among a small number of good news stories, technology distributor Renaissance's share price rose --from 46 cents in January 2000 to $1 at year's end - quite a feat in the present market. How? By being an -old economy company using new economy technology in a smart way. Renaissance is also planning to list Conduit, the B2B software part of the business, on the Singapore Stock Exchange where e-commerce is still -hot.

It's much easier to find the bad news. Local technology stock index DF Mainland lost 30.8% of its value by Christmas (the Nasdaq dropped nearly 35%) and we had a slew of cancelled deals (the merger of Force and Ihug, and Jump Capital's $8 million investment in Wilson Neill's high-speed wireless subsidiary Radionet, to name a couple).

New Zealand's tech wreck has hit both locally grown internet companies and foreign interests that expanded here. But it is some of the local ventures - the auction site TradeMe, the e-commerce music site mp3.net.nz and the news sites Scoop and Newsroom - that have achieved at least a modicum of success. What do these sites have in common? Low overheads, long hours, solid brands, and owner-operators with drive.

Grim reading

So what's the proof that New Zealand's tech wreck even exists? Fortune magazine's 2000 dot-com deathwatch stood at a total of 124 US deaths in December, and we haven't had a single slammer of a collapse. Sceptics, take a look at this:

Paynter Timber's move to become E-force, a service to link buyers and gain them bulk discounts, failed when (after all the iMacs and VW Beetles had been given away) it became clear there just wasn't a market. In mid-2000, E-force used what cash it had to buy a boring supply chain business, which at least had cashflow, and closed its internet portal.
Electronics payments company E-Phone quit its loss-making pre-paid telephone card business in December after spending mega-bucks on marketing and promotion - and then recording a $3 million half-year loss in September.
Also in December, New Zealand clicks-and-mortar cosmetics retailer Beauty Direct pulled out of a reverse takeover with South Auckland-based distribution company CS Company, announced just the month before. Despite reporting a half-year loss bigger than its revenue, Beauty Direct still has $2.1 million ring-fenced from the online operating losses for "investment opportunities" that chief executive Bronwyn Evans says now abound.
FlyingPig, the country's highest profile internet retailer, had to severely pare costs and staff numbers after the market fell out of love with the Amazon.com model it had so carefully followed. FlyingPig's plans - or those of its main shareholders - rested heavily on a "merger, float and walk away with cash" exit strategy, which stopped looking likely. In a shuffling of Eric Watson's e-commerce interests, FlyingPig was sold to publishing firm IT Media in November. A month later, IT Media was itself bought by Wilson Neill in a $17 million deal that gave IT Media founder Tim Connell a 30% stake in the listed Wilson Neill and made him managing director. At the same time, FlyingPig purchased CDStar, the music e-tailer of Estar Online, in a stock-only deal. The three key problems, according to FlyingPig co-founder Stefan Preston, were that the techno-logy was too complex for widespread consumer acceptance, it was costly to market without a street address, and there was a high logistical cost per unit shipped. "It was a risky approach that didn't pan out. But just because it wasn't successful doesn't mean it was a bad idea. We launched the internet economy with a lot of pizazz and got everyone talking about it. Now it's time for the hard work. The internet will deliver over time, but it will take much longer than first forseen." The e-tailer hopes to be making money early this year.
E-commerce investment holding company Qixel Capital Group (formerly ePac), owned by Eric Watson, Evan Christian and Nick Gordon, cancelled its planned Nasdaq listing.
The share price of 1999's darling, Advantage Group, took a hammering falling from an April high of $5.65 to $1.25 at press time. In response chief executive Greg Cross has started to eliminate non-core assets, starting with its 16% shareholding in venture capitalist Srathmore Group.
In late 1999, internet start-up eVentures - backed by Japanese internet investment powerhouse Softbank and Rupert Murdoch's Epartners - arrived in New Zealand with grandiose promises to bring in 50 top internet brands over three years, including Buy.com, -E-Loan.com and WebMD, as well as develop some good New Zealand ideas. Despite raising $35 million in its IPO, by Christmas 2000 eVentures had imported just one brand, E-Loan (which, in Australia, ran out of money in September after burning $A10 million in six months on negligible turnover). Buy.com tanked in Australia before it even got to launch here, and while eVentures has examined an array of local proposals, by the time Unlimited went to press it had lacked the confidence to spend money on anything other than E-Loan and its own high--profile directors and executives.
E-Loan was restructured in December into two business units, one for B2B and one for B2C, which will be scaled down after taking on The Warehouse as a majority partner.
Auckland web developer Clearview struggled, successfully, to avoid being brought down by the eye wateringly awful performance of its Australian parent LibertyOne, the JB Fairfax-spawned new media -vehicle (and Australia's first listed internet company). LibertyOne lost $A8.8 million in six months, before collapsing at the end of 2000. Clearview, bought for $10 million in 1999, was arguably LibertyOne's best asset. Forced to forsake its brand for that of LibertyOne's other web shop, the glitzy Zivo, Clearview was the only part of the empire still standing by December. LibertyOne's big franchise hope, the auction site uBid, was canned in Australia and New Zealand last October.
A localisation of Priceline.com, under the myprice brand, was canned late last year before it even launched.
After being unable to pay its bills elsewhere, the listed Australian company Reckon closed its New Zealand financial services portal, although it was meeting its targets here.

Worse to come?

Has the pendulum swung too far, or is there still a way to go? DF Mainland tech analyst Bruce McKay thinks the situation will get worse before it gets better, with one or two companies going to the wall, but he tips stock prices climbing by mid-year. IT Capital's Keith Phillips reckons values can't drop any further locally, and says some good companies have been sucked down with the bad. He cites his own company's share price of 19 cents, down from a high of 92 cents last March, and well below the 24-25 cent purchase cost of its assets. Advantage Group's share price fell from a high of $5.65 to just $1.26.

Venture capitalists, waiting to spend their money, are looking beyond sexy to solid. "It's not rocket science. We're looking for businesses that can generate reasonable margins from the products or services they're offering," says Wendie Hall, managing director of venture capital firm Caltech Capital Partners. In Hall's view, the worst impact last year had on start-ups was the low Kiwi dollar making offshore marketing more expensive.

Certainly no one is writing off the internet. "People are trying to use it more as a business tool than just a fashion accessory," says Ord Minnett tech analyst David Wallace. Investors, nervous after a number of blue chip companies such as Microsoft downgraded their profit forecasts, may be lured back - but this time they're likely to be more discriminating. They want companies with high gross margins or critical mass in their niche.

Renaissance chief executive Mal Thompson reckons there is opportunity for good, solid, well-managed tech companies to do very well. "There is a significant pile of money sitting around waiting to be invested in the right vehicle, but the dot-coms have got a lot to prove after burning a lot of money," he says. "Shareholders now expect a return."

Who do they think they are?

russell_brown@idg.co.nz, fiona_rotherham@idg.co.nz

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