Dotcoms May Move From Predators to Prey –

NEW YORK – New online titans may be flexing their muscles in splashy acquisitions, but with analysts sounding increasingly pessimistic about the future longevity of the Internet bubble, some Wall Street pros think that many smaller Web ventures might soon find themselves transformed from predators into prey.

Companies with the muscle of America Online Inc. and VeriSign Inc., which in April agreed to pay $21 billion for Network Solutions Inc., obviously have used their powerful currencies to acquire assets that can help ensure their continued survival. But for smaller companies still competing for a toehold in a particular niche, the prospects of a sharp market downturn are pressuring them to put their stock to use before it’s too late.

“Anyone who has this highly valued stock is saying, What can I buy? I’ve got this incredibly powerful currency, how can I use it to create value?'” said Sam Schwartz, a managing director in the technology M&A group at Merrill Lynch & Co.

The pressure on Internet entrepreneurs and investors ratcheted up earlier this month when Henry Blodgett, a Merrill Lynch analyst and well-known Net bull, predicted that a full two-thirds of all Internet companies will be bankrupt within five years.

“My gut reaction is that there will be zero value in [failed] Internet companies,” said Dan Schwartz, a money manager for York Capital Management, which specializes in investing in special situations including bankruptcies. “They will just liquidate and go home.”

In truth, most “pure-play” Internet concerns have little in the way of real assets, outside of personal computers and possibly a server or two. Even “far-fetched” telecom start-ups usually can claim spectrum ownership and at least a short list of paying customers, Schwartz said. This is not the case with online companies.

Little Value for Vultures

Unlike past painful downturns in the real estate and energy industries, in which savvy investors swooped in to pick over the remains of bankrupt companies, Internet ventures that go belly up will leave little of value for Wall Street vultures. However, the remains of former Internet darlings could prove tempting to another group: the very brick-and-mortar companies that investors now scorn.

Due to the discrepancy in valuations between offline and online companies, even the largest brick-and-mortar concerns that are unable or unwilling to develop their Internet capabilities in-house have been forced to rely on joint ventures with their Internet cousins, as opposed to acquisitions. “To the extent that online companies actually bring something to the table, as valuations become more in line there will clearly be the opportunity for acquisitions as opposed to joint ventures,” said Merrill Lynch’s Schwartz.

An anticipated shakeout among online retailers, for example, will provide traditional retailers – many of which presently can’t sell products or process customer orders online – a golden opportunity to make their own forays into the e-commerce arena. They will enter through mergers, acquisitions and partnerships with struggling e-tailers, according to a recent report by Deloitte Research.

“The projected downfall of many e-tailers means that a significant amount of value is going to be left on the table – value in terms of information about consumers, their buying patterns, the technology that failing or failed e-tailers will leave behind, not to mention a lot of people who have long resumes in building Web sites, communicating with suppliers, tracking orders, and handling consumer complaints,” the Deloitte report states.