Carving Out Clicks from Bricks-and-Mortar

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Take a staid, traditional company,"carve out" an independent company to become its dot com alter ego, more nimble, Net savvy, manned by up to the minute Net warriors and, of course, high on the Richter scale of Net company valuations, and watch the money roll in. If you own a business, either real world or virtual, you could jump on this money making bandwagon too.

Bricks-and-mortar business, the old, traditional business model, once a bit of an ugly ducking in the new, wired Net world, seems to be blossoming as a desirable Swan, when viewed as a company capable of giving birth to an entirely different species. Why, you ask, and more specifically, why now, when sky high valuations for Dot com companies have eclipsed their real world counterparts?

As you might expect, the answer has everything to do with money.

The new sheen on old business is due to the smart money men who've figured out that even some of the most conservative and earth bound businesses hold within them the seeds of great, warp speed Net companies, just waiting to be born, or "carved out", as the newly coined expression has it. The new model is taking a staid, traditional company,say a Fortune 500 company, and instead of just putting up a website on the Internet, actually carving out an independent company to do this, on the theory that the new Net company will be more nimble and Net savvy, manned by up to the minute Net warriors in tune with today's wired world and, of course, high on the Richter scale of Net company valuations. Wal-Mart, Nordstrom, and Proctor & Gamble have all chosen to go this route.

So,first, the company itself will make money, probably better and faster, by having new people design and operate their Net presence.

Second, the Internet company will be buoyed by having real,live revenues behind it,instead of always having to look to the future while hemorrhaging red ink today... think Amazon.com. Or the colossal development of AOL purchasing Time Warner, a move which might serve to cool its stock a bit, but gives it the real world compensation of Time Warner's stable revenue stream of about $27.1 billion in 1999 and cash flow of about $6 billion. Between the cash flow and the stock price, that's a lot of muscle in both the real and virtual world.

Third, this will benefit the stock holders of companies who, up to now, have lacked the flash of red hot Internet companies, as it will, no doubt, give a boost to stock prices.

And fourth, all those in the industry who make money off such deals......Venture capitalists, Silicon Valley and Silicon Alley attorneys and accountants will all make their cut, in addition to attorneys and accountants out in the hinterlands..... what one VC referred to as "fly over country", states that you fly over between California and New York..... will now have their opportunity to get in on the gold rush that the Internet had become today.

As a sign that the time has arrived for this new "carve out" strategy, Silicon Valley VC, Accel Partners, announced it is joining up with Kohlberg Kravis Roberts & Co., one of the top buyout firms, to do just this kind of deal together, to carve out Internet businesses from large, established firms.

"We believe the companies that operate in both worlds (the virtual and the physical) stand the best chance of success," says Accel managing partner Jim Breyer.

The grander strategy of the new firm, Accel-KKR Internet Corp will be to retain equity in these new "carved out" Net companies so that, over time,they will own a network of Net companies who may have synergy and be able to help each other out with different phases of the business, along the lines of CMGI and Internet Capital Group

What this means for the rest of us, those who own real world businesses, dot com companies, or real world businesses with a website, is that the world of finance is starting to value the connection and synergy between the two worlds, physical and virtual. This means it will be easier for real world companies to come out from the shadow of being viewed as "yesteryear" and emerge as key potential partners and allies for dot coms. For dot coms, it means a whole new slew of business models and various partnering arrangements will emerge, allowing dot coms to pick up current revenue from a real world partner, in exchange for opening a gateway to the future, as today's dot coms do. The new "carve outs", will soon usher in an era of real world and virtual partnering among smaller firms, adding to the bottom line of both.

In short, this is a win-win situation for all businesses nimble enough to figure out how to get themselves on this latest Net rocket.