While the mere mention of e-commerce sends many of Wall Street’s brightest to duck and cover, one company is buying up e-tailers faster than you can say dot-com. Sitestar Corp., a year-old startup, now has three e-commerce companies in its fold, and just made an offer for a fourth. The acquisitions, part of a strategy to acquire a stable of niche e-tailers and Internet service providers at sharply discounted prices, may seem odd, even ill-advised, in a market where many e-commerce companies are wobbling on the precipice of extinction and ISP’s are not making any money. But Sitestar executives have a different view. “You haven’t seen a great deal of the potential of e-commerce,” said Clinton J. Sallee, president and chief executive of the Encino-based firm. “The ISP strategy is certainly the backbone, but the (other) component is what we affectionately call opportunistic investing.” Sallee and his partner, Eric T. Manlunas, are buying up depressed companies at bargain prices, scaling them down and hoping to make a bundle when the market picks back up, either by selling or spinning them off. The only difference between Sitestar and the investors of the 1980s is the size of the deals. The three e-commerce companies Sitestar has acquired are tiny niche companies with annual sales of less than $100,000: Soccersite.com, a Web site that sells soccer-related equipment; greattools.com, which sells tools; and Holland-American.com, an e-tailer of foods from the Netherlands. Last month, Sitestar made its largest offer yet, publicly-traded ailing vitamin marketer, MotherNature.com Inc., for which the company has offered 75 cents a share or $11.4 million. At the time of the offer, MotherNature, which just laid off about 20 percent of its workforce, was trading at about 50 cents a share, a pittance of its initial offering price of $13 when the company went public in December. ‘Killer deal’ But if MotherNature’s business strategy appears shaky to Wall Street, its cash picture is crystal clear. The company has about $26 million in cash on hand. “The MotherNature deal sounds like a killer deal,” said Tom Taulli, Internet stock analyst for investment firm Internet.com, of the offer price in relation to the company’s cash position. “There are people that did that in the ’80s who saw value in these companies and made a lot of money off that. So I can see it as being a viable business.” Sallee, a 28-year old with a stint in investment banking and rejection letters from Ivy League business schools hanging on his office wall, and Manlunas, 31, a consultant for Arthur Andersen before founding Gateway Holding, a private equity fund, hatched the idea for Sitestar in May 1999 over a cup of coffee. Figuring there were many companies flying under the radar screen of most venture capital firms, and having access to funding, albeit on a small scale, they formed what was then Gazebo Inc. “I was more interested in the fundamentals side of the business than the Internet craze,” said Sallee. Although e-commerce had potential as an investment, the partners also realized they needed another avenue to generate revenues. They hit upon the idea of a second arm to the holding company, a group of niche Internet service providers in a specific geographic area. Many of these small ISPs were run by computer geeks with little business acumen, and they were going broke. But if the partners could buy enough of those providers in a single geographic area, they could achieve the kind of critical mass to make them profitable and generate a healthy sales volume in the bargain. “There’s great economies to consolidating an ISP,” said Sallee. “The single greatest cost is telecommunications equipment. The second is administrative. All these things can be done from a centralized location, so a consolidated position is pretty attractive.” Wanting to make their investments with stock trades rather than cash, Sallee and Manlunas acquired burrito maker Interfoods Consolidated Inc. in a reverse merger, sold the assets back to the company and used the shell to form their publicly-held company, which they renamed Sitestar. ISPs in sight With their shares, traded over-the-counter, Sallee and Manlunas acquired the three Internet companies and two ISPs in the mid-Atlantic region, an area the partners believe still has growth potential based on current Internet usage there. Sallee added that he is “working feverishly” at closing additional ISP deals. At the same time, the company is aggressively seeking new e-commerce companies to acquire. Their plan is to seek out Web companies that are highly specialized, offer good growth potential and have an infrastructure flexible enough to be downsized quickly if necessary. The business also has to offer marketing opportunities that don’t require a substantial investment. And, of course, the price has to be right. So far, Sitestar is operating in the red. For the three months ended June 30, the company reported a net loss of $234,000 on revenues of just under $387,000. But Sallee points out that much of the earnings bite occurred as a result of goodwill write-offs associated with the acquisitions, and the company returned to a solid financial footing in July. “We’re now cash-flow positive,” he said. The optimism may be well-founded, according to some onlookers who see potential in the markets Sitestar is pursuing despite the failure of many of these companies to turn a profit so far. “They can actually make some money if it’s not a crowded marketplace,” said Taulli. “If you get into a market like toys or books, forget it, but I do think that, on the e-commerce front, there’s definitely money to be made.”
