As Web Firms Sink, Some Find Partners to Stay Afloat

In a market increasingly littered with Internet casualties, SmarterKids.com considers itself lucky: The educational-toys retailer last week found a merger partner in Monterey, Calif.-based Earlychildhood.com.

The deal, which will give shareholders of Needham, Mass.-based SmarterKids.com one-third ownership of the combined company, didn’t immediately help its stock: The share price ended the week at $1.63 on Nasdaq, down from $1.94 on Wednesday, when the merger was announced.

Still, SmarterKids.com’s equity holders at least have a chance of seeing their share value revive--something many other “dot-com� owners don’t these days.

“We were very fortunate� to find a buyer, said Al Noyes, executive vice president of SmarterKids.com.

The reluctance of potential buyers to bid for the remains of such high-profile Internet failures as Pets.com and Garden.com in recent weeks has surprised some analysts. Webmergers.com, a San Francisco-based data service, says 21 dot-com companies have shut down already in November--a pace that will make this the biggest month for failures so far this year.

“There are some jewels out there,� argues Mark N. Clemente, a merger consultant. “We’re talking about bargain-basement prices at this point and companies that are down to the core product and just the 10 to 15 essential people.�

Potential buyers, however, may be scared off by concerns that the rash of failures is calling into question the sustainability of all sorts of Web business models, analysts say.

Even so, data show that mergers among Internet companies have in fact soared this year: There have already been 1,500 deals among Net-related companies, up from 1,040 by this time last year, according to Mergerstat in Los Angeles.

Though the pace of Net company bankruptcies might increase, so too will the number of mergers, many financiers say.

“The name of the game for the next 18 months is consolidation,� said James Montgomery of Digital Coast Partners, a Santa Monica-based investment firm.

But determining which money-losers are attractive candidates for potential buyers, and which are likely to simply fold, is no easy task. In general, of course, buyers want valuable names or technologies and significant real assets; they are more likely to shun companies with large outstanding bills to pay.

For Earlychildhood.com, a privately held, profitable company whose roots go back to 1985, acquiring 6-year-old SmarterKids.com offered a way to quickly expand an Internet presence.

Earlychildhood.com, majority-owned by an affiliate of Los Angeles-based financier William E. Simon & Sons, primarily sells educational products through catalogs and a field sales force. SmarterKids.com, by contrast, says it has gained 250,000 customers via its Web site since it was launched two years ago.

“This combination . . . joins a rapidly growing catalog business with best-of-breed Web expertise,� said Ronald Elliott, Earlychildhood.com’s current chief executive.

The merged company, which would have had sales of $70 million in the first nine months of this year, plans to issue new public stock after the deal closes.

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Debora Vrana can be reached at [email protected].