Case 18: NetJ.com

A few years ago when the stock market was reaching new highs every day, investors were pouring more and more money into the capital markets. This free flow of funds encouraged small firms to go public before they were ready. More directly, many of these firms had limited track records, and in several cases, no track record at all. Still, with such a hot IPO market, these premature public offerings had been extremely successful; the majority of these firms had no problem fully subscribing their shares.

The market capitalization of NetJ.com was over $22.9 million. Yet in their SEC statement it read, "The company is not currently engaged in any substantial business activity and has no plans to engage in any such activity in the foreseeable future." How is it that a firm with no business operations had come to command such a market capitalization? NetJ.com began under the name NetBanx.com. The mission of this firm was to perform bad debt collections for doctors. Finding this to be a not so profitable venture, the firm shifted gears. Recognizing that the IPO process is a lengthy and expensive one, they saw value in the fact that they were already a publicly held corporation. As such, they could identify private companies who wished to go public, but didn't want to put the necessary time and effort into the process. The game plan was to merge with the other firm and have that be their line of business.

This practice of making it up as you go along seemed not only to be a necessary course of action, but an attractive one as well. The trick appears to be keeping yourself "new." NetJ.com is certainly keeping itself open to possibilities. As stated in their SEC statement, "The company does not intend to restrict its search (for a partner) to any particular business or industry…high tech, natural resources, manufacturing, R&D, communications, transportations, insurance, brokerage, finance, and all medical related industries." That pretty much covers it.

With "extremely limited assets" and "no source of revenue," one wonders how long NetJ.com can continue to command a stock price above zero before investors stop believing in possibilities and start demanding performance.

Questions

1. How is it that a company with little to no track record can successfully go public?

2. How can a firm with no revenue have a positive stock price?

3. Why would a privately held firm generating significant profits consider merging with a publicly held firm who seems to be without direction and who is operating at a loss?

4. How long can a corporation with no revenue and no immediate plans to generate revenue expect to have their stock price supported by the market?