Hi Trev, One good turn ... CMGI creates confusion by clarifying
redherring.com
CMGI (Nasdaq: CMGI) tried to shed its platypus image Thursday, but the market was left wondering exactly what kind of animal it's trying to be. The public venture company's attempt to "clarify" its business model raised even more questions.
Wall Street was not pleased with the news, pushing down CMGI's shares $3.50 to close at $43.19. Investors are still confused over the company's business model, says one CMGI analyst.
Shareholders were nonplussed by chief executive officer David Wetherell's new "emphasis on growth and profitability." CMGI has a long hike to get out of the canyon it has fallen into: it posted a net loss of $740 million on revenues of $503 million for the nine months ended April 30. That's in sharp contrast to a profit of $23.5 million on revenues of $120 million in the same period a year ago. Operating losses soared from $75 million in the first three quarters of fiscal 1999 to a gut-wrenching $1.4 billion in the first three quarters of this fiscal year.
As part of its streamlining effort, CMGI announced that it would consolidate its venture funds and that it would not move forward with plans to participate in the launch of a $1.5 billion global venture fund with Hicks, Muse, Tate & Furst and Pacific Century Cyberworks (NYSE: PCW).
Illustrating the confusion about just what CMGI is up to, Redherring.com got conflicting messages from Mr. Wetherell and David Andonian, the company's president of corporate development. During a conference call with analysts Thursday morning, Mr. Wetherell said CMGI would create five business lines (not including its venture fund), and that it would be optimal to have one company per business line -- down from a current 17 companies.
In an interview with Redherring.com Thursday afternoon, Mr. Andonian appeared to downplay the fact that there would be a consolidation. The new structure "doesn't imply everything needs to be rolled in together," he said. He added that there would be "five or six plays in a segment and that may lead to acquisitions, divestitures, or mergers."
A company spokesperson later clarified that CMGI's goal is in fact to "get to one to two companies within each segment."
DIVIDE AND CONQUER
The six new lines of business and the companies within them are as follows: search and portals (Altavista, iCast, Myway.com); infrastructure and enabling technologies (Activate, CMGion, Equilibrium, Exchangepath, Navipath, Navisite, Tribal Voice, 1stUp.com); Internet professional services (CMGI Solutions); interactive marketing (Adforce (Nasdaq: ADFC), Engage (Nasdaq: ENGA), Yesmail.com (Nasdaq: YESM)); e-business and fulfillment (SalesLink, uBid); and venture capital: (CMGI @Ventures).
The new structure will result in layoffs, Mr. Wetherell says, but he declined to give specifics. CMGI's 17 companies employ about 5,800 people. "To the extent we do intercompany mergers, there is bound to be overlap," Mr. Andonian says. "We will look to redeploy people first, but there could be some layoffs."
The layoffs may be prompted by the new corporate development officers who will be put in charge of each of the new business lines. The role of those officers isn't altogether clear. They will not have responsibility for profits and losses, nor will they be general managers of the business lines, Mr. Andonian says. That means there should be no conflict between those officers and the CEOs of each of the companies, whom Mr. Andonian says will continue to run their firms with the "help" of the officers.
However, common sense suggests that there will be conflict, because, as a company spokesperson says, the role of the corporate development officers is "to ensure that those segments attain leadership positions through the companies in each of those segments." How do you achieve a leadership position by keeping all of the CEOs -- and their employees -- happy in each of the companies in your business line? The job necessitates that the officers will be in charge and do whatever it takes to make each of the segments successful.
WALKING AND TALKING
This interpretation is in line with that of two securities analysts who follow CMGI. The company took a big step toward becoming a traditional holding company with several business lines commanded by top lieutenants, the analysts say. "They talked the talk of a holding company, now they're starting to walk the walk," says Steven Frankel, a managing director at Adams, Harkness & Hill. "I think it's the right move."
What happens to the officers once their jobs are done in 9 to 12 months is yet to be determined. Do they step in and run the one large company that is left after the consolidation? There is no official word on that. A spokesperson says that there is a recommendation that those officers would take a seat on the board of the one (or maybe two) companies left in each segment.
As the restructuring moves forward, some are questioning how much of it is being driven by Mr. Wetherell and how much of it is being driven by the company's board, which plays a very active role.
"The whole restructuring was led by Dave and the management team with the full support of the board -- and it was not contentious," says a CMGI director who asked not to be named.
While one source close to top management says that the board isn't happy with Mr. Wetherell, the unnamed director says the board has a "fantastic relationship" with its CEO and that there is "discussion and debate [during meetings], but there is no contention."
Mr. Wetherell and the board did get into a tiff when CMGI raised CMGI @Ventures IV last year, according to two highly placed sources. In the previous funds, Mr. Wetherell and chief financial officer Andrew Hajducky III were allowed to participate in the "carry," or profits, from each fund. With the fourth fund, whose sole limited partner is CMGI, the board decided that no individuals would take part in the carry -- to Mr. Wetherell's chagrin, one source says.
Mr. Wetherell could not be reached for comment.
STREAMLINED FUNDS
In addition to streamlining its operations, CMGI is tightening up its venture capital division, CMGI @Ventures. It is consolidating its three current funds, CMGI @Ventures IV, CMGI @Ventures B2B, and CMGI @Ventures Technology into one evergreen fund to be called @Ventures IV.
CMGI is the sole investor in the evergreen fund. The fund will invest at a pace of about $25 million per month, says Peter Mills, CMGI @Ventures's cofounder and managing partner. "It's just cleaner to be investing out of one fund," Mr. Mills says. CMGI already has invested $247 million from this consolidated fund, he says.
One business area CMGI remains interested in is the so-called bricks-to-clicks market, which involves bringing established land-based corporations to the Web.
CMGI has not been an active investor in optical network hardware, one of the hottest investment spaces right now. Don't expect to see that change soon. Mr. Andonian says, "We've recognized what's happening in optical, and we've deliberately chosen where we're going to invest. We're not reacting as much as we're proactively deciding where we can win."
The company may bring in some optical experts for its infrastructure and enabling technologies business, "but where we have leverage and expertise is in the application and services layer -- monetizing the bits rather than delivering them," Mr. Andonian says. |
