Net Outlets Run Under Corporate Umbrella

In the new economy, traditional businesses spun off their Internet divisions into separate companies with big dreams of dot-com riches.

In the new economy, traditional businesses spun off their Internet divisions into separate companies with big dreams of dot-com riches.

In these more sober economic times, many of those companies are bringing their Net offspring back to the nest — to the great displeasure of some investors.

The latest to join the growing trend is Saks, which announced plans to integrate its online operations into its flagship Saks Fifth Avenue stores and eliminate its Folio and Bullock & Jones catalogs.

"We clearly recognize now that the online market is not of a sufficient size at this time to justify the substantial investment involved in this separate structure," R. Brad Martin, chairman and CEO of Saks, said in a statement.

The companys Saks Fifth Avenue Enterprises group will continue to pursue a multichannel strategy that includes stores, direct mail and e-commerce. However, it will substantially simplify the Saks Direct business by streamlining its infrastructure and business processes, Martin said.

As the buyback trend continues, parent companies are purchasing their affiliated Net properties for pennies on the dollar.

In March, The Walt Disney Co. bought back Walt Disney Internet Group for $5.64 per share. The stock closed at $35.44 on its first day of trading. In April, Vitamin Shoppe Industries, a privately held company that sells vitamins, bought back for $1 per share. The stock initially sold for $11.

NBC and Credit Suisse First Boston are trying to do the same.

"Most companies are realizing now the Internet is simply another channel for doing business," said Robert Labatt, director of research at Gartner. "Its complementary to their business, and it makes more sense financially to operate them together."

But some of the companies are meeting with resistance. Earlier this year, Staples announced plans to buy back shares of its tracking stock at $7 per share — a 115 percent premium — in a move that infuriated shareholders in the parent company. They charged that company directors were profiteering at shareholders expense.

Staples shareholders filed a class action suit that alleges the purchase is "a waste of Staples corporate assets," according to securities filings. The buyback could cost the company up to $90 million. was originally valued at $3.25 per share when the tracking stock was created in November 1999. Staples directors, venture capitalists and some Staples employees received the stock. Staples.coms goal of becoming a public company in 2000 never materialized.

Last week, a Wilmington, Del., judge delayed a shareholder vote on a Staples plan to buy back its shares, saying that in its stock evaluations, the office supplies retailer misled shareholders regarding certain issues.

A Staples spokesman said the company has no plans to revise its $7 offering for shares of, and that the price is justified, given the Internet divisions performance.

Other online retailers are restructuring their businesses and assigning executives at the parent companies to help run the dot-com companies.

"In hindsight, it wasnt such a great idea to spin off dot-coms," said Carrie Johnson, a retail analyst at Forrester Research.

Multichannel retailers now realize that consumers who shop online, in the store and through catalogs spend more, and that its best to have all three divisions communicating with one another so the customer gets the best possible service, Johnson said.

In April, — the online retail partner of Kmart — said that Mark Goldstein, its CEO, left the helm of the company as part of a restructuring that includes layoffs and merging of some operations with Kmart.

For now, BlueLight remains independent, but the closer merchandising and marketing ties exemplify the direction in which traditional retailers are moving to save money and integrate their e-commerce ventures.