Why round-trip deals aren't so bad.

Commentary about business and finance.
Aug. 21 2002 7:02 PM

Round-Tripping

How Enron and Qwest ruined a smart New Economy business practice.

Spurred in part by a Washington Post investigation into "unconventional deals" at the pre-merger AOL, the Securities and Exchange Commission is rummaging through the attic of the hobbling post-merger AOL. At the center of the investigation, according to the Wall Street Journal,are so-called round-trip transactions, which the Journal defined as a company selling "an unused asset to another company while at the same time agreeing to buy back the same or similar assets at about the same price."

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Round trips—also known as "Lazy Susans"—were a commonplace not just of AOL but at many other New Economy companies, from dot-coms to energy traders, from fiber-optic networkers to computer hardware manufacturers. Investigators are also looking into the round-trip practices of Qwest, Global Crossing, Enron, Dynegy, and other companies.

While the theory behind round trips was sound and perfectly in keeping with the spirit of the times, the practice ultimately proved damaging. Much like Marxism, round trips were elegant in theory but corrupted by the ambitions and shortcomings of flawed individuals.

Unlike Marxism, round trips rested soundly on one of the oldest pillars of trade and capitalism: barter. Indeed, for a variety of reasons, the oldest way of doing business made a great deal of sense in the new networked economy. While they differ in their mechanics and execution, round trips and barter have the same net effect: Goods or services of roughly equivalent value change hands, without either side suffering a meaningful reduction in its cash position.

In the mature, old economy, businesses generally paid for goods and services with cash. Components suppliers sold parts to manufacturers, who in turn sold finished products into the distribution channel. Advertisers paid cash for time on television. The parties involved may have worked together on marketing or promotional efforts, but essentially the business relationship ended with a trade of cash for goods or services.

But as the Internet altered traditional modes of doing business, it also disrupted the traditional relationships between suppliers and business customers. The networked economy was all about taking what you had in abundance—eyeballs, software, content, routers—and leveraging it into that which you needed—consulting services, Web traffic, advertising.

Very few New Economy companies—save the software and hardware firms—were in the business of selling products you could throw in the back of your Jeep. They were selling content, services, placement, and access to networks and customer bases. What's more, the Internet facilitated entirely new means of promotion and marketing: click-throughs, pop-up ads, etc. And so it was natural for companies to strike deals to harmonize their interests.

Companies that provided online software, for example, were natural suppliers to big Web sites and Internet service providers. But they were also natural advertisers on those same sites. And so they began to swap equipment and their goods and services for placement and ad space. The same held for consultants of all varieties. Ultimately, the items available for trading came to include placement on Web sites, fulfillment functions, computer supplies, and equity.

Even the dot-coms flush with cash recognized the advantages of trading stuff for goods and services. Among the unconventional deals cited by the Washington Post was an instance in which AOL traded advertisements for computer equipment with Sun Microsystems. Of course, AOL could have afforded the equipment, and Sun could have afforded the advertising, but it was cheaper, cooler, and (that ultimate New Economy attribute) frictionless to do it this way.

The biggest firms were in a prime position to cut deals. Frequently, the big firms took stock, stock options, or warrants as their consideration. By swapping placement on its online store for equity stakes, Amazon amassed a substantial portfolio of investments in other dot-coms.