An Over-Valued Dot-Com?

Here’s a twist: shareholders complaining that a dot-com is being over-valued. That’s right. Over-valued. In 2001. After the Nasdaq debacle and the shakeout and all the rest.

The complaints being lodged at office supplies retailer Staples over its dot-com division have already spawned lawsuits and seem to be leading to a nasty battle erupting at the annual shareholders meeting later this spring. But the complaints are also short-sighted.

Yes, by today’s standards, a 100 percent profit for some executives on a dot-com stock is a bit of a stretch. But this isn’t about today’s standards. It’s about the big picture.

About Face

The complaints stem from what amounts to a bailout on the company’s efforts to take its Staples.com division public. That plan, needless to say, had absolutely no legs left given the mess on Wall Street.

But Staples had promised its workers both within the dot-com division and elsewhere that the early investments they made in a dot-com tracking stock would not stay locked up forever. So Staples recently announced it would trade each share of dot-com stock for about 40 percent of a share in Staples.

That makes each dot-com share worth about US$7. Not exactly a blue chip, but not too shabby either, considering where other e-tail divisions of traditional retailers are trading. The plan makes millionaires out of some of the executives who took a risk by joining the dot-com division at a risky time.

A Billion Here

But the problem, say the angry shareholders, is that it overvalues the Web division, placing a total price tag of about $900 million on the unit. Based on today’s standards, they say, that’s ludicrous.

But, they are wrong. The dot-com unit is expected to do a billion dollars in sales next year, a sizeable percentage of the company’s total of $7 billion in sales. Yes, it’s losing money, but it’s not as if the unit is burning cash and it’s not like it doesn’t have a strong brick-and-mortar backstop. Isn’t that what Amazon is searching for?

The angry investors say that given how far Yahoo! and Amazon have fallen in the past year, valuing the stock of Staples dot-com unit at about twice the $3.50 per share that employees and investors bought it for is simply pocket-lining. But let’s take a step back and take a drink of the entire panorama.

Fast Forward

Five years from now, the dot-com unit is going to play a much bigger role in the Staples business plan. By then, there should be true integration of channels. Who knows, the in-store kiosks might actually be worth the pennies a day in electricity they chew up by then.

More important is the fact that Staples will have a unit that was built to stand alone, a division originally constructed to be an IPO-worthy spinoff.

That should give investors confidence that Staples can be a player online. After all, there is something to be said for flexibility. And for taking care of employees and shareholders.

Most of all, there’s something to be said for e-commerce. Yes, the values on Internet stocks were overblown a year ago. But arguing that they’ll never go back up is just plain silly.

What do you think? Let’s talk about it.