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‘Vulture capitalists’ swoop in on tottering dot-coms

Help doesn’t come cheap for failing Internet businesses

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For years, many Net entrepreneurs secretly smeared their venture capital benefactors, dubbing them "vulture capitalists" for their opportunistic ways even as they happily accepted round after round of financing.

It was often a game of greed, but one with rules: You give me money, I give you a piece of my company. Done deal.

Well, the rules are changing. The same dot-commers that once derided their VC partners as vultures are now encountering a whole new breed of profiteering business partners.

A cottage industry of sorts has cropped up around the burnt edges of the Internet in recent weeks, populated by dealmakers mining for gold among failed or failing dot-coms.

Some openly call themselves vulture capitalists. They want to buy a company, relaunch it in their own image or sell it for parts. The vulture is a failed dot-com's last resort.

Close behind, but nowhere near as lethal, are the consultants. These folks want to reposition dot-coms, guiding them through troubled waters for a hefty fee, or better yet, an equity stake. In the best case, a consultant will right a wrong dot-com and end up sitting on the board of an Internet juggernaut.

Then there are the bankers, who are hoping to broker a deal between struggling entities in an effort to create a stronger whole. You can call them the "consolidators," since that's their primary mission. In a way, they are descendants of the merger and acquisition (M&A) specialists of the 1980s.

Regardless of name, intent or motive, they all offer the same promise: Help for the tottering dot-com.

Of course, help doesn't come cheap.

High-flying Net execs are learning the hard lessons of the salvage yard. Rule No. 1: You don't get what you paid for it. Rule No. 2: You don't get anywhere near what you paid for it.

The other side of the equation, however, is quite attractive to this new breed of dot-com opportunist. Any good profiteer knows the getting is best during a downturn.

Jim Nesfield, a 42-year-old former Wall Street trader, is not shy about his motives.

"I'm what they call a vulture," said Nesfield, who once made his money on Wall Street trading "bankrupts and distressed," which boils down to buying and selling debt, for Boston-based Cowen and Co., an investment firm now known as SG Cowen.

"The Street has turned because of (Net firms') high burn rates. Basically, they're throwing the baby out with the bath water," says Nesfield, who adds he is ready to save the baby . . . and then adopt it.

"We seek Internet-related companies that are experiencing financial distress, underperforming relative to expectations or undergoing significant organizational or operational change.

"We create the business plan, deploy our team and work to maximize the potential not yet realized. We create value based on performance allowing portfolio investors time to manage more viable situations."

And then he drops the hammer:

"We must have controlling interest either by proxy or direct ownership."

Nesfield is excited about being one of the first to foray into Net salvage operations.

"You just have to get to know the assets. And you can get them cheap because the holders are scared," he said. "My sense is they'll drop the ball if you flash a little cash."

Last week, Nesfield was in hot pursuit of bankruptcy papers from APBNews.com, the New York-based investigative reporting Web site that filed for Chapter 11 protection. Nesfield hopes to buy APB's debt from its creditors and then assume an equity position with the company. He is confident that the site can and will be revived.

"You're basically trying to buy dollars for 50 cents. That's the distressed game," said Nesfield, who said his seed money comes from "offshore investors."

Valuating Net firms, however, is a tricky business.

"That's why the Net thing is so interesting right now," Nesfield said.