Buy High, Sell Low
By Sheldon Sandler
Money talks, as the saying goes. If you were at the NADA Convention in Orlando, you saw plenty of evidence of this old adage at work. Internet-driven companies, some of which weren't even in existence last year, dominated talk at the show. Actually, the dot-coms weren't so much talking as they were shouting. The Internet business model, as anyone who ever watched the evening news knows, has become the biotech investment phenomena raised exponentially.
It's no surprise that venture capitalists with seemingly more money than sense have targeted the trillion-dollar car industry. Does a bear eat honey in the woods? What's curious is how many fresh-faced neophytes who seemingly never had a job before much less read a dealer statement are now presidents and executives of these new companies that will be changing the way cars are bought and sold.
In the interest of shedding a little light on these most opaque of business strategies, I thought it might be instructive to conduct an interview with the newest of the dot-com companies. That would be "IcangetitforyoucheaperthantheotherguyDirect.com" (IGIFT for short), formed just two weeks before the show. It has already raised over $500 million from the venture capital community. You may not have seen their booth. They didn't have one as their company was not in existence prior to the booth order deadline. The following is the interview I conducted with Penelope Misbegotten, IGIFT's President.
What is your background?
I'm 25 years old and grew up on the east side of New York City. I received my undergraduate degree in Transcendental Meditation from Harvard and my MBA in Finance from Stanford in 1998. My thesis was entitled "Chaos Theory Implications on the Future of Internet Retailing."
How did you become involved in IGIFT?
I was inspired by the book "The New, New Thing" and realized that if you have a great idea, actual experience and a proven track record are liabilities in today's fast paced e-commerce world. It's more important to get out there on the playing field even if you haven't really figured out what it is you're doing and even if you haven't a clue how your idea is going to make any money. Netscape never made any money and Mapquest never did, either. Their founders became billionaires anyway.
Why another car buying service?
It became evident to me that consumers needed a better Internet alternative to negotiating with seedy despicable car salesmen. Don't you just hate those guys? We felt that the best price could be gotten for the customer by forcing the dealers to compete with one another. We all know that CSI, brick and mortar, training and all the other make-work of the average car dealer are the refuge of the unenlightened.
Before we get to the substance of your business model, let me ask you two interrelated questions. What car do you own and have you ever worked in a car dealership?
Well actually I've never owned a car. But my father did. I haven't actually ever seen a dealership much less worked there. I truly believe that this is an advantage for me. By not knowing anything about the business I won't be corrupted by conventional wisdom and I'm better able to think "out of the box." Were talking about a paradigm shift here and its easier to shift something if you're not weighed down by old ideas and experience.
This sounds remarkably like the attitude this industry saw when the used car super store hit the scene. They quickly found that the car business was the most complicated of all retail businesses. Wayne Huizenga, one of the most respected and resourceful of all entrepreneurs, has found this business remarkably resistant to change and has been absorbing a steep learning curve. Why do you think that you will fare better?
Who's Wayne Huizenga?
Can you describe your strategy and how you intend to differentiate it from the 38 other dot.com companies in this exhibition?
We feel that this has already become a very competitive sector but it's our conviction that a certain entertainment factor is missing from all the other sites. They're boring.
We believe our opportunity is to be the entertainment car buying Web site.
What does that mean?
We intend to provide the consumer with a reverse Dutch auction. Sort of like Priceline, "The Psychic Hotline" and "So You Want to be a Millionaire" all rolled into one. The idea is that the consumer will go online and identify that he or she might conceivably be interested in purchasing a vehicle. We will then hold a virtual contest for all participating dealers to guess what that vehicle is. The winners of this first round will then have the opportunity to guess how much the consumer would pay for the car, if he or she were in the mood to buy one. If the dealer guesses correctly, IGIFT will then buy the car at invoice price and sell it to the winner for $2000 below invoice. Both the dealer and the consumer will be the winner.
Intriguing if not brilliant. One of your problems is that because you don't have your own inventory you have to buy it from a dealer, whom may not want to cooperate with your business plan. Do you have any plans to solve this conundrum?
We don't see that as a problem. As you know at least one of our competitors has announced its intention to buy 100 dealers to circumvent what amounts to no more than a petty annoyance. We are going to take this one step further. Why settle for the milk when you can buy the whole cow?
Could you be a little more specific?
For starters, I am pleased to announce that we have concluded a definitive agreement for the acquisition of the Ford Auto Collections, GM Retail Holdings and the Saturn Retail Enterprises. They always wanted to go public and we are giving them the chance with us. We will then reverse merge Daimler Chrysler into IGIFT just like AOL bought Time Warner and go public in a $10 billion dollar IPO. Our Investment Bankers are salivating over their fees. We will enter into purchase agreements with the other automotive manufacturers to buy cars directly from them.
Aren't you concerned about franchise laws?
No. The first thing we did was to contribute to all the state legislators' political campaigns and we have hired the best lobbyists to overturn the franchise laws. Money talks and we've got plenty of it.
What about trade-ins?
No problem. Most people I know don't trade their old vehicles; they give them to their children or donate them to charity.
This all sounds like a very capital intensive approach. I don't understand how your company is going to earn any money in the foreseeable future.
Well actually that would be a concern only if the intent was to make money in the first place. Let's not forget that our goal is to go public as soon as possible. That can only be assured by losing as much money as possible in the shortest amount of time. The public investor cares about growth and market share. PE ratios and earnings per share analysis are outdated notions for judging the performance of companies. They only indicate that growth has slowed. Losing money is the new virtue because it is proof that we are still growing.
I still don't get it.
It's really quite simple. We have rewritten the rules to economic success. All you have to do is buy high and sell low.
Thank you, for a most enlightening glimpse into the future of retail automobile sales. I'm sure that you have given every car dealer in America much to chew over.
Sheldon Sandler is CEO and a founding partner of Bel Air Partners. Bel Air advises its clients on capital market transactions including Initial Public Offerings, REITs, franchise loans, private placements, and mergers and acquisitions. ssandler@dealeronline.com
