Promises not enough to save dotcom stock

The speculative bubble has fallen right out of the new economy stocks, and for good reason: they can't always deliver what they promise.

There have been three perfect illustrations of that in the past week. First was the internet service provider eisa, the little ISP that said it could, but couldn't. Then came Thespot, the e-tailer that said it had the money, but didn't. Lastly came Amazon.com, the online monolith that grew and grew and grew until it threatened to blow itself up.

Eisa has been the most spectacular casualty of the Australian tech bubble because most money has been lost by the most people in what is now a dead duck.

The company, which listed on the ASX less than a year ago, turned investment and business principles on their head in February when it announced a takeover of OzEmail's residential ISP business - a company that was valued at five times its own market cap.

When eisa announced its buy, there wasn't a word about how it proposed to pay for the deal. But did the market care?

Not at all. Its shares jumped five-fold and that seemed to solve the problem. John Fairfax, ANZ and Hastings Funds Management clambered on board, offering to buy stock at $2 a share, and even the venerable Disney offered to throw in some of its content.

But it wasn't quite enough. Eisa, for whatever reason, was unable to attract the interest of anyone else. Perhaps it was simply the fall in the Nasdaq, but what had appeared as an excellent business proposition one week suddenly looked like an empty bucket the next.

Eventually, the owners of OzEmail told eisa they no longer had a deal. Eisa had nowhere to turn. It had lost a $A20 million deposit on the OzEmail proposal and had just over $1 million left in the bank; its prospective backers had dropped it like a hot potato; the international business empire of major shareholder Johnson Wang was collapsing around him.

The whole sorry mess was finally revealed to stunned investors last week.

Wang, the company said, had agreed to sell a 19.9 per cent stake in eisa for a dollar. The board had agreed, and recommended that all other shares be sold to the Pay-TV group Austar at 20c each - a fraction of their February high of $3.19 and just a fifth of their August issue price of $1.

The shareholders are stuffed. They have lost their investment, and their frustration will not be helped by reports this weekend that eisa had refused an offer from the very same Austar at $1.50 to $1.80 a share. Questions will be asked.

The collapse of TheSpot.com was a little less spectacular, but it is another cautionary tale about what happens to a company when it no longer has cashflow.

TheSpot ran out of its cash very quickly as its plans to expand got ahead of its budget. It was confident it would continue to enjoy the support of its backers, but has now had to settle on becoming a subsidiary of David Jones.

This will be the signature tune for many dotcom companies in coming months. Cash is drying up, the market is not sympathetic to new raisings and there will have to be an excellent business plan to attract any further funding.

The weekend news about Amazon.com, the biggest retailer on the net, is not encouraging, either. There are concerns that even this monolith may miss its own sales forecasts and run out of cash.

On Friday in New York, its shares tumbled a further 19 per cent, taking the decline in its market value since last December to a staggering $A43 billion.

It's enough to make one get excited about the old economy again, particularly in light of the increasing corporate activity - with BHP and arch-rivals Smorgon battling for control of Email and another BHP rival, Rio Tinto, launching a $2.8 billion offer for North.

Rio's bid follows its own unsuccessful attempt to negotiate a merger of its iron ore business with that of BHP. They couldn't cut a deal. Rio has now launched a hostile cash bid at $3.35 a share, and BHP, just as it was in the case of Email, may find itself forced to intervene.

* Giles Parkinson is deputy editor of the Australian Financial Review.