Homestore cheats the hangman's noose
Defying the odds, this Internet pioneer gets a new name, a cash infusion, and another chance to make it big.
(Fortune Magazine) -- When forced to reflect on the bygone dot-com bust, we tend to focus on spectacular flameouts, like the laughably profligate Pets.com. Less noted are the survivors, including those that seemingly have no business still being around.
Case in point: the former Homestore.com, recently renamed Move, a scandal-plagued company that has taken so many knocks it's a wonder it still has enough cash to power up a website.
Yet it does. Like a handful of Internet-oriented startups that raised enough money when times were good, always made fundamental sense as a business, or recruited shrewd managers after the first crop washed out, Homestore has managed to survive.
It has done so despite the recent conviction on insider trading and securities fraud of its former chief executive officer. Not even crushing litigation claims from a customer (Cendant (Charts)), a partner (America Online (Charts)), and a group of shareholders were enough to close the doors at Homestore, which capped a four-year turnaround last November by raising $100 million in fresh capital.
Having cheated the hangman's noose, in June the company changed its name to Move, not only leaving behind its sordid past but also more accurately conveying the business it is in: online information about new homes, not-so-new homes, and apartment rentals.
Through the prism of this one company, you can pretty much view the entire rise, fall, and rise again of what used to be called e-commerce. Before the bottom fell out of its stock in 2001, its market capitalization had roared past $9 billion, even though it hadn't turned a profit and had barely more than $250 million in sales.
It had a huckster CEO, Stuart Wolff, whose failure to stop the company's infamous "round trip" advertising deals landed him in federal court. Several other Homestore executives involved cut deals with the feds to reduce their punishment; Wolff is facing sentencing that could send him away for decades. (Round-tripping is the improper accounting of barter transactions that have the effect of inflating reported revenues and profits.)
By 2002, Homestore's stock traded for 14 cents, and the company's board, led by venture capitalist John Doerr, recruited a new CEO, Mike Long, who had salvaged Healtheon WebMD, another volatile Internet player.
Faced with $4 billion in litigation claims, Long managed to resolve them by giving $13 million and a 14% stake in the company to a group of aggrieved shareholders led by Calsters, the California teachers' pension fund. "We told all the damaged parties, 'We don't have $4 billion,' " says Long.
He says he only recently has been able to devote the majority of his time to running the company, as opposed to dealing with its bubble-induced hangover.
Finding a life raft
Move is still with us for two basic reasons. First, it has an exclusive relationship with the National Association of Realtors to operate its Realtor.com website. That popular web destination continues to account for the lion's share of Move's revenue.
The second reason is the sheer size of its potential market. Long notes that of $20 billion spent annually on real estate advertising, only 10% is spent online. "The opportunity is obvious," he says. "It's logical to us that a significant portion of this advertising spending will shift to us."
Indeed, that opportunity was what helped lure one prominent investor. Elevation Partners, the private-equity fund whose founders include rock star Bono, invested $100 million in Move late last year. "Real estate is a big category, arguably the most important sphere in the U.S. economy," says Elevation's Roger McNamee. "I just think it's an area that is grossly underserved."
The cash infusion has allowed Move to adopt a new strategy, albeit one with a flavor-of-the-month quality to it. It's now calling itself a "real estate search engine" because it has converted its new-home and apartment-rental sites (formerly Homebuilder.com and Rentnet, respectively) into free, advertising-supported websites.
Rather than charging homebuilders and apartment managers for listings, the new Move electronically culls websites throughout the country - a practice known as crawling -to assemble a master list of available properties. Soon it will add a feature for builders and landlords to contribute their own new-home and rental listings to move.com, stealing a page from Craigslist's playbook.
The company will also allow individuals to contribute commentary, such as the neighborhood's best dry cleaner or tastiest pizza joint across all its websites. Says Long: "We want to give people the opportunity to share what they've learned."
So should investors pile into a fallen angel on the upswing? The company says it's capable of 20% annual revenue growth and cash-flow margins of 20%, but not in 2006 as it rejiggers its business and heavily promotes the site. For what it's worth, Elevation's investment, purchased in the form of preferred stock, converts at $4.20 per share. (Move recently traded at about $5.) Elevation also gets a 3% annual dividend that's not available to regular investors.
Competition promises to be fierce. Sites like Lendingtree.com, Mynewplace.com, Rent.com, Zillow, and Apartments.com already compete for some part of Move's targeted advertising market.
Google (Charts) doesn't have a real estate offering yet but has been methodically picking off promising Internet categories like finance, video, and payments. Asked if it planned to launch a Google Real Estate, a spokeswoman responds, "Our objective is to connect Google searchers to quality information from real estate experts. We are in regular conversations with a wide variety of companies and partners across the real estate industry to explore ways we can work together."
Curiously, Move doesn't currently count Craigslist - which refuses to allow Move to crawl its listings - as a competitor because the mostly free listings site doesn't behave much like a business.
The new Move, on the other hand, is trying, again, to prove that it can be a successful business. After more than a decade of existence, multiple strategies, a revolving door in the executive suite, and numerous names, Move is a lot like a startup, or, more precisely, a restart. At least one safe bet seems to be that it won't go away any time soon.
From the July 24, 2006 issue