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Firesale.com? E-tailers eager to sell at rock-bottom prices

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SAN FRANCISCO — Internet retailing companies are being unloaded at fire-sale prices.

With their bank accounts dwindling almost as rapidly as their stock prices, some online merchants are selling their companies at sharp discounts that would have been inconceivable just a year ago.

The latest example: German multimedia giant Bertelsmann AG said Thursday that it is buying CDNow Inc. for $117 million — an 80 percent markdown from the online music retailer's value in its 1998 initial public offering.

"We are at the beginning stage of a significant consolidation in e-commerce," said Bob Kagle, general partner at Benchmark Capital, a Menlo Park, Calif., firm that has financed some of the Internet's most valuable companies, including eBay and Ariba. "We are going to see lots of opportunities for good deals while many people hide under their desks, afraid of this Internet phenomenon."

The first wave of clearance sales includes:

— The April purchase by Charles Schwab Corp. and four other investors of a 25 percent stake in E-Loan for $40 million, a 73 percent discount from the online loan broker's June 1999 IPO.

— Last month's agreement by the Webvan Group to buy rival HomeGrocer.com in a stock swap that, as of Thursday's market close, represented a 40 percent discount from HomeGrocer's IPO less than five months ago.

— Pets.com's purchase for just $14 million in stock last month of rival Petstore.com, which had burned through roughly $110 million of its investors' cash.

"Get used to these kind of deals," said Adam Sarner, an analyst for the Gartner Group in Stamford, Conn. "A lot of these companies are running out of money, they don't have many customers and they can't keep their employees around because their stock is falling."

In many instances, e-tailers will just go out of business because no one wants to buy their failing companies at any price, analysts said.

The Internet is already littered with tiny retailing businesses that abruptly shut down with little notice beyond a curt announcement on their Web sites.

But other Internet merchants have built decent brands and distribution systems that at current prices look like bargains for businesses trying to expand their online presence.

"Look at what Bertelsmann is getting for $117 million: They are getting an e-commerce infrastructure, a customer base and a whole lot of employees who know how that sales system works," said David Cooperstein, an analyst with Forrester Research in Cambridge, Mass. "It would have cost the company a whole lot more than $117 million to build all that from scratch."

Analysts expect to see many more deals involving well-established companies snapping up Internet upstarts. That's because people seem to want a choice of where to shop — at an old-fashioned store or through a cutting-edge Web site.

But melding the real and virtual worlds — a combination known as "clicks-and-mortar" — isn't a surefire formula for success.

Hollywood Entertainment learned this harsh fact after buying video merchant Reel.com for $90 million in October 1998, when e-tailers still demanded premium prices. The unprofitable Web site became a huge financial drain for Hollywood Entertainment, losing $82 million in 1999.

On the Net: www.cdnow.com; www.webvan.com; www.homegrocer.com; www.eloan.com; www.schwab.com; www.pets.com