Compaq Bids $220 Million for O.C.’s Shopping.com

In a deal that underscores the runaway expectations of Internet retailing, industry giant Compaq Computer Corp. on Monday offered to buy Shopping.com, a troubled and money-losing online merchant in Corona del Mar, for $220 million.

The acquisition comes a week after the end of the annual Christmas shopping season, which saw gift-buying via the Internet more than double to an estimated $3 billion. Along the way, shares of Internet-related companies have soared to dizzying heights as investors are betting that the medium is changing the way people shop.

Indeed, the buyout was a major reason why Internet stocks soared again Monday while the overall stock market fell.

Analysts said the deal is unusual given Shopping.com’s tumultuous past. Last spring, the Securities and Exchange Commission halted the trading of its shares for two weeks, citing wild swings in its stock price.

The company went public in November 1997 at $9 a share, and traded as high as $39 last March before trading was suspended amid concerns that its underwriter, Irvine-based Waldron & Co., was artificially inflating the price of its shares.

In addition, Shopping.com has lost $18.4 million through the nine months ended Sept. 30 on sales of $4.01 million, and has been through three chief executives in the past seven months.

But officials at Houston-based Compaq said they are more than willing to overlook those concerns for the bigger picture. The deal builds on Compaq’s leap into the consumer Internet business with last summer’s acquisition of Digital Equipment Corp. and its AltaVista Web search engine.

The proposed acquisition will allow Compaq to better compete with the likes of Yahoo Inc. and Excite Inc. by giving shoppers access to a wide range of products and services from nearly 1,000 merchants.

“We think Shopping.com is a struggling upstart with good technology that got hit with a sequence of very bad experiences,” said Rod Schrock, senior vice president and general manager of Compaq’s consumer products group.

Investors apparently agreed. On Monday, Shopping.com shares surged 41%, or $5.41, to $18.59 in over-the-counter trading. The $19-a-share cash offer represents a 41% premium over Friday’s close of $13.16. Compaq shares gained $3, or 6.6%, to $48.38.

Schrock said that after some management turmoil, Shopping.com has a solid team in place, led by Chief Executive Frank W. Denny. Denny founded Group InterCom, a marketing company.

“They’ve just suffered from a lack of working capital,” Schrock said.

Indeed, money has been tight at the struggling online retailer, as the 2-year-old firm has been selling products for less than their cost to gain market share. In September, Shopping.com said it needed to raise at least $26 million over the next 12 months to stay in business.

Additionally, the Internet retailer began growing too fast and started faltering with its delivery service, say company sources. Last fall, customers began complaining of slow and uneven service, and filed dozens of complaints with the California Better Business Bureau, according to agency staff.

“We’ve slowed the business down somewhat,” Denny said. “Hopefully, we’ve learned our lesson.”

Monday’s news marks the latest in a series of consolidations among Internet companies, notably America Online Inc.’s $4.2-billion deal to buy Netscape Communications Corp. as part of an effort to broaden AOL’s already large audience. As a result, the Internet retail landscape is changing from an open bazaar to walled-off gardens designed to corral potential customers into private shopping areas.

As part of this effort, online portals such as Netscape and Yahoo are buying up companies that offer “sticky” applications--ones that would compel users to return to the company’s Web site at least once a day. Such services include access to electronic stores, as well as free e-mail, instant messaging and online daily calendars.

Analysts said that Shopping.com is a bargain for a company as big as Compaq--which is debt-free and usually carries between $3 billion to $4 billion in cash on its balance sheet.

“Considering the market cap on other online retailers, this deal lets AltaVista get the [e-commerce] assets they need pretty cheaply,” said James McQuivey, a senior industry analyst for Forrester Research.

In September, the SEC accused Waldron of inflating Shopping.com’s stock price by 255% by restricting the amount of shares available to trade. Regulators charged the brokerage firm with parking Shopping.com shares in fictitious customer accounts, which kept clients from selling shares.

The National Assn. of Securities Dealers ordered brokerages that sold Shopping.com stock--including Waldron and Los Angeles-based Wedbush, Morgan Securities--to pay a total of $400,000 in compensatory damages. Last month, the NASD suspended Waldron’s regulatory registration after the brokerage failed to pay its share, $350,000.

“This is all really old news, and doesn’t have any impact on today’s news,” Denny said. “The SEC has the right to look into whatever it wants to look into. But [Waldron and its staff] has nothing to do with us now.”

The board of directors and management of Shopping.com have unanimously approved the acquisition and will recommend shareholder acceptance, said company officials.

Founder and Chief Executive Robert J. McNulty, who is now a consultant to the company, owns or controls 1.56 million shares, or about 34% of Shopping.com stock, according to regulatory filings. On Monday, those shares were worth $28.9 million.

Shopping.com still faces several shareholder lawsuits and a complaint by Yahoo, which is seeking more than $2 million in damages for allegedly breaking an advertising and sponsorship contract. In June, Shopping.com signed an agreement with the Santa Clara-based portal that was designed to boost the retailer’s online profile, according to regulatory filings.

Shopping.com staff have denied the allegations, and said the company has paid Yahoo $200,000 in conjunction with the agreement.

Yahoo officials could not be reached for comment.

* HIGH-FLYING SECTOR: Despite an overall decline on Wall Street on Monday, Internet-related shares zoomed. C1

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Shopping Sale

Shopping.com has taken investors on a wild ride during the last year, ranging in price from more than $30 to around $1. It began to rebound toward the end of 1998, closing up more than $5 Monday after news it would be acquired by PC giant Compaq Computer Corp. Weekly prices and Monday’s close:

March 13, 1998: 32.02

Monday’s close: $18.59

Note: April 3 close not available. Securities and Exchange Commission suspended trading for two weeks on March 24.

Source: Bloomberg News