Bottom Rung on Top

About a year ago, I wrote some amusing columns about how Internet stocks might take over companies from the “real world.” The columns were based on the atmospheric values investors were giving to Internet stocks.

We’ve come back to Earth since then, and the roles are reversed. Now it’s the dot-coms that are the prey, and the real-world companies should be looking to buy.

The flagship of the e-tailing space, of course, is Amazon.com. At its recent price of $31 per share, the company is worth under $11 billion.

That sounds like a lot of money, and it is. Amazon is still worth more than J.C. Penney, K-Mart, and even Nordstrom. Overall, retailing stocks are flat over the last year, according to CBS Marketwatch.

But there is one retailer that could buy Amazon without breathing hard or even diluting its earnings.

That company is Wal-Mart. At its recent price of about $60 per share, Wal-Mart is worth over $265 billion. Over the last year, Wal-Mart shareholders have done 30 percent better than Amazon shareholders.

The deal would be perfect. Wal-Mart and Amazon have built completely different infrastructures. Wal-Mart’s systems are designed to move merchandise to big stores, while Amazon’s systems are designed to move merchandise to individual homes. Amazon has a super web site; Wal-Mart’s still lags. After integrating purchasing functions, Wal-Mart’s purchasing power would give Amazon some real margins for a change.

Wal-Mart would not have to even talk to Jeff Bezos to buy the company out. In the last week, top stock analysts have abandoned Amazon’s side. Several downgraded the stock last week. When analysts back off a stock, shareholders look more kindly to a buy-out. Wal-Mart could offer Amazon shareholders a 50 percent premium over the current price, $45 per share in stock, without seriously diluting its own earnings.

Let’s assume for a moment that Wal-Mart’s executives read this column and decide to swoop in. Can Amazon find a “white knight” who will save it from the clutches of those “hicks” in Bentonville, Arkansas?

The most logical candidate would be Yahoo. At its recent price of $135 per share, Yahoo is still worth $72 billion.

But there’s a huge risk here. Yahoo’s profits don’t erase Amazon’s losses. A Yahoo bid would send its own stock price plummeting. Yahoo might wind up getting bought, too.

The other potential rescuer is Costco. The warehouse club has done slightly better than Amazon in the last year. It carries a market capitalization of over $14 billion. A merger of equals with Amazon would be possible, and if Wal-Mart tried to buy Costco, its own Sam’s Club warehouses would guarantee an antitrust fight with the government.

The purpose of this exercise isn’t to put Amazon up for bid. I own stock in none of the companies I’ve mentioned here. The lesson is simply that things change. When investors give you power, you’ve got to use it because it’s certain that in time you will lose it.

Let’s sum up that Clue this way. When bulls turn into bears, they develop a taste for meat.

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