Cramer's Rewrite of His 'In Pursuit of a Net Killer' Piece

The trader fleshes out Web politics.
Author:
Publish date:

Editor's note: This is the third of James J. Cramer's four Take Two columns this weekend. The first addressed organic growth, and the second looked at Amazon and its investors.

Let's say you are an old-line publishing or entertainment company involved in traditional businesses threatened by the Net. You see all of these companies coming public with small amounts of stock that then give them a currency to make deals and mount assaults on your businesses. You keep hoping that the stock market will cool off, but it doesn't. You keep hoping that the IPO market will die down, but it won't.

(Of course, this is conjecture. I do enough work with the dead-tree guys to know, frankly, that most of this kind of thinking is way too nefarious for them. They are naive about the Net, as naive as

Wal-Mart

(WMT) - Get Report may have been before Jeff Bezos of

Amazon.com

(AMZN) - Get Report raided them and then competed head-on against them. But the notion that these companies float stubs to get a currency going, that really drives these folks crazy. They would kill for a currency they could use that would not be dilutive to all of those earnings estimates out there. Remember, when Company A buys Company B and then guides Wall Street that Company AB will make less money than Company A as a stand-alone, AB goes down. That is very simple.)

Why not take matters into your own hands? Why not raise capital yourself and, at the same time, sate all of the IPO buyers? Can you do it?

Possibly.

There have been as many as 30 deals this year that are Internet plays. That's a ton of deals, but they have only raised about $2.5 billion in capital. That's a pittance, yet it has created a hydra-headed .com that can crush traditional businesses that are bound by EPS, multiples and dilution, things that .coms don't have to worry about. (If you don't believe me, you weren't listening to Bezos on the last Amazon quarterly conference call, when he said that he didn't care about near-term results and was instead focusing on building a business!)

(You have to understand that all of these Internet deals, as bountiful as they have been, are small potatoes. Extremely small potatoes. The have virtually no impact on the sums that can be invested. They tap out nothing. And they create their own demand because funds get a little on the deal and then have to go into the aftermarket to get their full positions.)

What keeps National Gift Wrap, Magazine & Movie Co., a major conglomerate with interests in cable, movies and entertainment that's got a small but profitable Web division, from killing two birds with one stone by issuing 100 million shares at 25 in National's Internet arm? In one fell swoop, you'd tie up all of the capital that would have been used for another 30 companies, you'd raise enough money to actually do something big in the space and you'd have a currency that would allow you to make dilutive acquisitions that wouldn't hurt the parent. You'd tap out the whole Net IPO dollar pool with this one, but good!

(This was

Lex Luthor

plotting, but there is a limited pool of capital that goes to underwritings and that pool can be tapped out. You would not see a pop in deals if all of the IPO money got exhausted. Check out the spring of 1996 and the fall of 1993 if you don't believe me. In both of those periods, the pools for aggressive growth underwritings got tapped out, and the window closed.)

Shouldn't

Barnes & Noble

(BKS) - Get Report

have done this three years ago to stop Amazon? Shouldn't Wal-Mart have focused more on online shopping and sopped up the whole pool of capital? Or

Walgreen

(WAG)

? Or

CVS

(CVS) - Get Report

?

(Of course, these companies initially didn't believe that it could happen. They didn't understand the Web. Oh, they say they did, but give me a break, they had no clue and they were blindsided. That's OK. That happens. (But once the Net got big, these guys were still gun-shy because they would have to lose money on the Web, which would cut earnings estimates and bring their stocks down. That's the truly galling thing to these old-line managers; they hate the fact that nobody gives a darn about earnings for the Net but that everybody cares for things off the Net. (That's because, of course, the Net world is very separate from the rest of the world, with all of its own buyers and sellers -- but mostly buyers. Oh, and every time some guy comes on TV and talks about my/your/our pharmacy .com, CVS et al. get hammered, just hammered. We saw this week after

Express Scripts

came on TV Wednesday. It killed CVS!!)

I love the Net but have to believe that with this last blast upward, some of these old-line companies will adopt this strategy before it is too late and they lose the whole shooting match. If I were running National Gift Wrap, Magazine & Movie Co., I would be implementing this very strategy today.

It could be the only real Net killer out there.

(Sure enough, this is the rumor for both

Time Warner

(TWX) and

CBS

(CBS) - Get Report, but they still haven't pulled the trigger. By the time they do, the market might change. But these deals would mark important tops in the Net stocks, in my opinion, and really should be watched as a moment to take something off the table.)

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in the stocks mentioned, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

letters@thestreet.com.