Bond & Pecaro's CyberValuation 2001 Establishes Roadmap for Valuing Internet Companies
Valuation Study Examines 1,327 Recent Transactions

Washington, DC, January 23, 2001—Bond & Pecaro, Inc., a Washington, DC based consulting firm, has released its third annual in-depth study on the valuation of Internet companies. Since the inception of the Internet economy, buyers, investors, and entrepreneurs have struggled to keep ahead of changing valuations of Internet companies. Which sectors are consolidating? Which are expanding? Are multi-billion dollar valuations justified? Can unprofitable companies sustain their valuations? These questions saw some unsettling answers in 2000. CyberValuation 2001 investigates Internet company merger, acquisition, and IPO activity in the year 2000 to provide a roadmap of trends and valuation benchmarks.

"Valuations have become more and more important as the financial markets and investors have realized that profitability and cash flow are the real drivers of value and not the overexuberance and hype we experienced last year," says Bond & Pecaro principle, Tim Pecaro. "Internet companies are being forced to reexamine their business plans to identify a road to profitability. Cash burn rates are the focus of Wall Street and until Internet companies can prove they are making significant progress toward real cash flow they will be punished with low valuations and the inability to raise additional capital. This lack of funding threatens the very existence of many Internet companies as we head into 2001."

CyberValuation 2001 examines five industry segments, including Internet Service Providers (ISPs), portals, business-to-business (B2B), business-to-consumer (B2C), and Internet infrastructure. The study provides trailing year revenue and unique monthly visitors valuation multiples, as well as sector trend analysis. The report also profiles individual transaction details such as purchase price, offering proceeds, market capitalization, revenues, and unique monthly visitors, where available.

Company principal Jeff Anderson emphasizes, "Internet companies were reminded about the importance of free-cash flow during 2000. Capital dried up because the prospects for Internet company profitability was not evident. Companies are now doing all they can to propel their businesses to profitability as soon as possible."

CyberValuation 2001 Summary Findings

CyberValuation 2001 has developed revenue, subscriber, and unique monthly visitor valuation multiples for ISPs, portals, e-tailers, infrastructure, and business-to-business e-commerce ventures. For the selected transactions, the enterprise valuation multiples by segment were as follows:

The primary theme driving the ISP segment is broadband build-out. The growth potential is enormous and has far-reaching operating implications across all sectors. However, the build-out is likely to be slower and more difficult than projected. Infrastructure build-out is prohibitively expensive and will be cumbersome for many of the major players in the industry whose debt levels are already high. Competition among access providers remains intense, pushing basic access fees lower and impacting revenue growth. These factors will drive rapid consolidation as smaller operators are unable to compete and larger companies are denied access to much needed capital to extend their infrastructure footprint. Valuation multiples will decline accordingly.

The portal segment is in a precarious position heading into 2001. Although online advertising is the fastest growing segment among all types of advertising, portal advertising growth will be affected by the general slowing of advertising expenditures among both Internet and old economy companies. Banner advertising is not as effective as advertisers would like and the rollout of rich media advertising is contingent upon continuing infrastructure build-out. Likewise, problems in the B2C sector have dramatically slowed expectations for e-commerce transaction fees. Capital has evaporated as the venture capital community has shunned advertising-based operating models. Except for the very largest portals or those with a unique niche, operating losses will continue and companies will have to sacrifice growth in order to move to a profitable position.

Undoubtedly, the B2C sector has been the hardest hit and prospects continue to look bleak. Traffic growth to many sites remains positive, however e-tailers have found it exceedingly difficult to convert traffic to buyers. Even successful brands such as Amazon warn of heavy layoffs early in 2001. Razor-thin margins, well-funded competition from brick and mortar companies, and the absence of capital for operating expenses will continue to force many e-tailers to shutter operations or sell any remaining valuable intangible assets such as customer lists, trade-names, or affiliation agreements to suitable buyers. Valuation multiples have already reached low single digits similar to many traditional retailers, however the prospects for eventual operating profits still seem unattainable without operating capital.

Growth in the B2B segment is just beginning. Despite the opportunities to utilize the Internet to extract inefficiencies from business operations, the capital markets hinder the growth of this segment in much the same way as in the ISP, portal, and B2C sectors. There continue to be many of the same challenges in the B2B segment. The benefits of online marketplace exchanges are well documented and will be realized, but more slowly. ASPs need access to capital to grow their services. Consultants have realized their menu of digital services do not make them scalable like some of their high technology clients. In general, valuation multiples remain inflated and will fall.

Capital continues to be available for a select group of infrastructure sector companies. However, even currently attractive sectors including the wireless infrastructure and optical networking sectors, appear crowded and oversubscribed. Nonetheless, before many of the future consumer and business services can develop, the software and hardware tools, applications, and devices need to be created and put in place. For this reason, companies such as those providing Internet-enabling software or hardware components for the Internet have a bright future. Premium valuation multiples will continue to be ascribed to companies in this sector compared to the ISP, portal, B2C, and B2B sectors.

The lesson driven home in 2000 is one that everyone already knows—cash drives value. The capital markets tightened because buyers and investors woke up to the fact that many companies would not attain profitability within a reasonable time frame. Valuation multiples plummeted. In order to survive and sustain value, Internet companies now have to find a way to be profitable quickly: even excellent companies—and very soon.

About Bond & Pecaro, Inc.

Bond & Pecaro, Inc. provides valuation and financial consulting services to major players in the Internet, broadcasting, cable television, wireless, and publishing industries. Bond & Pecaro's professionals have appraised over 4,000 media and technology concerns. Firm members have extensive experience in market research, valuation-related tax matters, financial and economic analysis, and litigation support.

For additional information about Bond & Pecaro, Inc., or to place an order for CyberValuation 2001 ($695), call 202-775-8870 or visit www.cybervaluation.com or www.bondpecaro.com. Any communications regarding the book or its contents may be directed to Jeff Anderson at jeffanderson@bondpecaro.com.