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Dot-Com Bubble Has Burst, Lunacy Continues

The party's over, but the cleanup continues.

Wal-Mart (WMT) and Kmart (KM) are buying out their respective e-tailing investments.

Gateway (GTW) is suing OfficeMax (OMX) because it wants back the $20 million it invested in a dot-com tracking stock OfficeMax never created.

What's clear is that even if the bubble deflated quickly, it's messy dealing with a deflated bubble. Sadly, the same lunatics running the asylum during the upswing -- the fairly maligned entrepreneurial-investment banking-venture capital complex -- continue to dispense the pills.

Consider the case of Staples (SPLS). Its shareholders filed suit when the office-products retailers tried to buy out its Staples.com unit at a valuation that ensured a healthy return for insiders and the venture capitalists who invested in the dot-com, which never went public. Staples had the misfortune of having filed an IPO for Staples.com, so litigators could get their hands on the dot-com's finances, even though the offering never occurred. Included in the filings were details of what the VCs paid for their stakes. When Staples proposed to pay $7 a share, a premium over the $3.25 Staples.com investors paid, shareholders howled.

The insiders subsequently agreed to give up their profits by selling back to Staples their Staples.com shares for their original price. They include Staples CEO Thomas Stemberg as well as directors Robert Nakasone (a former CEO of Toys R Us and one of the first Old Economy guys to screw up a dot-com experiment) and former Massachusetts senatorial candidate Mitt Romney. But Framingham, Mass.-based Staples still plans to pay the other dot-com shareholders about $7 per share for their stake.

What makes this interesting is that because of the lawsuit, Staples had to explain to shareholders in great detail how it got to the $7 per share, which will benefit venture investors General Atlantic Partners, Highland Capital Partners and Greylock, all bastions of the East Coast venture scene. Staples spelled out its explanation in an amended proxy statement filed Tuesday with the Securities and Exchange Commission in advance of a stockholder meeting Aug. 27.

The explanation is long. Very long. But a few salient points illustrate the lunacy of the exercise. First, to get to a fair valuation of the Staples.com business, Staples established comparable valuations, based on a price-to-sales multiple, of eight Internet companies: Amazon.com (AMZN), eBay (EBAY), priceline.com (PCLN), Onvia (ONVI), Drugstore.com (DSCM), Webvan (WBVN), barnesandnoble.com (BNBN) and Travelocity.com (TVLY). Never mind for a moment that these businesses have vastly different profiles and that one, Webvan, is now out of business.

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