In a Paradox, a Dot-Com Finds Itself With Too Much Cash

Baldwin Louie — Mon, 23 Apr 2001 15:00:00 -0700

NEW YORK -(Dow Jones)- A primary lesson to be learned from the bursting of the Internet bubble, some have argued, is that a dot-com can never have enough cash.

That's what makes Stamps.com Inc.'s (STMP) situation so unusual. The struggling online seller of postage has a huge cash stockpile of $213 million, more than the company's $137 million market capitalization. It's also more than the company needs following a dramatic scaleback of operations, executives acknowledge.

Now, Stamps.com is considering giving some of its cash to shareholders. The Santa Monica, Calif., company is under pressure to do so from some of its institutional holders, including shareholder activist Robert Chapman, who holds less than a 5% stake.

"Will there be some cash back? I would think so," Interim Chief Executive Bruce Coleman told Dow Jones Newswires. "It's not going to happen in a heartbeat. But in six months, maybe the board might do it."

But first, Coleman says the company must resolve pending litigation with Pitney Bowes Inc. (PBI). The longtime maker of postage meters sued Stamps.com last year, alleging that Stamps.com's services violated Pitney Bowes patents. Stamps.com could be liable for cash damages.

What's more, Stamps.com's directors are wary of future "unlawful conveyance" litigation. That is, if Stamps.com distributes cash to shareholders but subsequently finds that it needs the cash to meet business obligations, the directors could be held personally liable, Coleman says.

Any return of cash would probably be in the form of a self-tender offer or Dutch auction, in which the company pays cash to repurchase shares from shareholders, Coleman says. He declined to be more specific about the size and timing of such an offer.

Fueling the clamor for a return of capital is the fact that Stamps.com has dramatically cut its cash burn rate to about $6 million a quarter from $33 million last summer. Stamps.com expects to begin posting positive cash flow in the first quarter of 2002. That means it should burn through only $20 million to $25 million of its hoard before it begins generating cash from operations.

Stamps.com's healthy cash position is rare among money-losing dot-coms of its size. Most dot-coms with comparable revenue have much smaller cash reserves. Online retailer Bluefly Inc. (BFLY), for instance, had $5.4 million in cash at Dec. 31, the end of its last reported quarter.

How did Stamps.com get so cash-rich? It sold a lot of equity back in the heady days of 1999, when investors were willing to pay outlandish sums for shares in unprofitable Web firms. The company raised more than $400 million in its June 1999 initial public offering and a subsequent offering, not to mention millions more in private financing and an investment from AOL Time Warner Inc. (AOL).

Stamps.com proceeded to burn through much of that cash. And like other dot- coms, Stamps.com saw its shares plummet in 2000, falling 95% to a low of $2.22 in December. In October, the company decided it had to end its heavy cash- burning ways. After a management shuffle, Coleman took over and proceeded to cut costs by reducing the work force by 72% and ending an expensive marketing deal with AOL.

For several months, Stamps.com shares have traded for less than cash on hand on a per-share basis. The stock closed Friday at $2.82, down 19 cents and 34% below the company's $4.34 in cash per share.

Such a gap is usually interpreted to mean that the market places negative value on Stamps.com's operations. Indeed, Goldman Sachs & Co., which was hired as an advisor, has been shopping Stamps.com around to other companies since January, but hasn't found any buyers, Coleman says. Stamps.com's depressed shares caught the attention of Chapman, who began building his stake in December, when the stock bounced between $2 and $3. Chapman is head of Chap Cap Partners, an El Segundo, Calif., hedge fund that has previously pressured other companies into agreeing to buyouts or returning cash to shareholders.

In January, Chapman wrote a letter to Coleman, proposing the company launch a self-tender offer to buy back half of its outstanding shares for $4 a share in cash. The move would return $100 million in cash to shareholders.

Chapman also wants Stamps.com to use an additional $50 million for a standard repurchase program. That would leave the company with about $60 million to fund operations, which Chapman says is more than enough.

"They shouldn't have this much money, and they should have returned it by now, " Chapman says. Chapman doesn't buy the company's argument that the Pitney Bowes litigation needs to be resolved first. He doubts the company's liability would eat up much of its cash.

Chapman admittedly doesn't have much faith in Stamps.com's business model. "I think (Stamps.com executives) have a pipe dream that they can fix the business," he says.

But Coleman disagrees. "I think there's a fundamental business model there," he says. "I don't know how much it's going to grow yet, but there's a model where we can take in more then we spend...It can be a very good cash machine and a pretty predictable revenue stream."

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In a Paradox, a Dot-Com Finds Itself With Too Much Cash