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Raging Bull's Cyberstock Investor Report - June 18
**RAGAS SPEAKS FOR THE WEEK***
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A quest for respect
While Net infrastructure players like search technology and caching software
company Inktomi (INKT) have watched their stock prices soar into the
stratosphere over the past 12 months, other Net infrastructure firms like
MessageMedia (MESG) have watched their stock prices languish at very
terrestrial levels.
One can almost imagine the employees of Boulder, Colo., company quietly humming
"R-E-S-P-E-C-T. Find out what it means to me" in their cramped cubicles each
day. The e-messaging firm is the Rodney Dangerfield of Internet infrastructure
players. No respect, no respect.
Even after shelling out $46 million last week to acquire e-mail marketing firm
RevNet Systems and $50 million the following day to scoop up e-mail customer
feedback firm Decisive Technology, no one seems to be taking notice of
MessageMedia. Even the initial public offering of e-mail services firm
Mail.com (MAIL) earlier today and the planned IPO of related e-mail services
firm USA.net next week have done little to stimulate investor interest in
MessageMedia.
Aretha Franklin's call for respect continues to go unanswered for the company,
but after its recent moves I find it very likely that the Street will soon be
forced to take notice of this particular child from the Softbank family of Net
companies. The e-messaging toddler will be making too much noise via
acquisitions and organic growth to be ignored.
A child of Softbank
The firm was originally founded as First Virtual Holdings, a secure online
payment firm. After several agonizing and unsuccessful years in the secure
payment space, and with the company on the brink of bankruptcy, Japanese
venture investor Softbank swooped in last May with a much needed cash infusion
and began reworking the company's business model. First Virtual acquired Email
Publishing and Distributed Bits, a pair of e-mail delivery and
marketing-related firms. First Virtual then changed its name to MessageMedia
and morphed into a firm providing a variety of outsourced direct marketing and
customer relationship management services via e-mail.
The transition has not been easy for MessageMedia, but investments from
Softbank and a revamped management team lead by Laurence Jones appear to have
this one-time Web failure back on track. The potential size MessageMedia's
market is enormous. Market research firm Forrester Research estimates that 250
billion e-mails will be outsourced by the year 2002, up from only 3 billion in
1998. If that's not a powerful projected growth rate and market to be in, I
don't know what is.
Forrester believes the outsourced e-mail services category will grow from $8.5
million last year to nearly $1 billion in the next four years. If MessageMedia
can continue to execute its e-messaging roll-up acquisition strategy, the firm
has the potential to capture a hefty slice of a potentially large pie. It
already comes to the e-messaging dinner table with a very large knife and fork.
Larry Jones is ready for his team to chow down.
Recent acquisitions
The first question on the minds of MessageMedia shareholders last week was, do
these two acquisitions make sense? Yes. Definitely. MessageMedia's
acquisition strategy is the right move to make in a young, growing space like
e-messaging, which is fragmented into a number of smaller private companies.
The deals are valued at a total of roughly $96 million, not that MessageMedia
overpaid. According to a Denver Post article, the acquisitions will triple the
company's size.
MessageMedia posted only $753,527 in first-quarter revenue, so tripling the
company's size is not a Herculean task. But the price paid could prove
invaluable when you look at the clients and new technology these buyouts bring
aboard the MessageMedia ship. I expect the pace of acquisitions to continue.
After all, MessageMedia has the first-mover advantage of being the only
publicly traded e-messaging player. That advantage won't last forever.
During the downturn in Net stocks, MessageMedia is at a distinct advantage when
negotiating with private firms. The company can issue stock to continue its
e-messaging consolidation crusade while its competitors are only left with a
finite stash of cash to fund their own acquisitions. I'm sure going the
acquisition route became a much more attractive exit strategy for RevNet and
Decisive in the past two months as they watched the recent correction in Net
stocks. MessageMedia shareholders will suffer some dilution from these and
future deals, but the company gets that much closer to reaping the spoils of
victory by consolidating an entire industry.
Not only do both of the acquisitions enhance the suite of e-messaging services
MessageMedia can offer clients, but they also bring new blockbuster clients.
Big name RevNet clients include The Wall Street Journal, Electronic Data
Systems (EDS), Mirage Resorts (MIR), Ingram Micro (IM), Sony (SNE) and NBC.com.
Decisive's powerful clients like America Online (AOL), Microsoft (MSFT),
Oracle (ORCL) and Apple Computer (AAPL). Pair these new customers with
existing MessageMedia clients like Bertelsmann, CMP Media, E*Trade (EGRP),
GeoCities (GCTY), USA Today, Barclays Bank and you have one heck of client base
to leverage.
MessageMedia can use the new clients to cross-sell its e-messaging services.
I'm sure Larry Jones sees a day in the not-to-distant future when he can
approach a large multinational corporation like a Cisco Systems (CSCO) and say,
"what are your e-mail outsourcing, customer relationship and direct marketing
needs? You name them and we can fill them."
Maybe that explains why MessageMedia registered the domain name
“CiscoMessage.com” last month. Could a deal with Cisco be brewing? Gary
Reischel, managing director of Softbank Technology Ventures and a MessageMedia
director, was a former director of channel sales for Cisco. Even more
interesting is the fact that Softbank founded Nihon Cisco Systems with Cisco
and 12 Japanese companies back in 1994. Even if nothing ever pans out between
MessageMedia and Cisco, MessageMedia is putting in place a powerful suite of
e-messaging tools that will allow it to serve the needs of the world's leading
tech companies.
Management
Don't be surprised by MessageMedia's recent acquisition binge. Just look at
the past history of Jones and MessageMedia Co-chairman Gerald Poch. These two
are merger and acquisition animals, plain and simple. They seem to thrive on
cutting deals and leading corporate turnarounds. For a battered and bruised Net
startup like MessageMedia, these two would seem to be an ideal fit.
Both executives have spent large portions of their careers as dealmakers and
company consolidators. Obviously, the young e-messaging space is on the verge
of tremendous growth and is ripe for consolidation. Enter Poch and Jones.
With MessageMedia stock as currency for future deals, the two have the enticing
Internet paper needed to become the Web's first e-messaging rollup player.
So what makes me confident of Poch's deal-making abilities? Back in 1992, he
founded Sage Alerting Systems Inc., a company that went on to gobble up a dozen
or so systems integrators and value-added resellers in the following year.
Only a year after that, Poch's company acquired AmeriData Inc. before selling
out to General Electric's (GE) GE Capital in 1996. Poch then became president
and chairman of GE Capital Information Technology Solutions, where he grew the
unit's annual sales to roughly $3 billion before leaving GE last year.
Jones is also far from being a wallflower when it comes to playing in the world
of mergers and acquisitions. Before joining up with MessageMedia, Jones
provided strategic management advice to various portfolio companies of McCown
DeLeeuw and Co., a private investment firm. Jones is also no stranger to
playing turnaround guru. He was brought in by leveraged buyout firm Hicks Muse
to lead a major restructuring of Neodata, a direct-marketing services firm.
After successfully increasing the company's revenue and margins, Neodata was
sold to EDS in 1997. By taking the helm at MessageMedia, Jones was thrust into
a similar turnaround situation. Only this time he has the opportunity to
become the acquirer and not the acquiree.
The Softbank portfolio
I hope Jones has learned how to say at least “thank you” in Japanese, because
Softbank and its affiliates' 49% stake in MessageMedia would appear to be a
godsend. Softbank has proven time and time again that it loves for its Net
portfolio companies to play ball together. While this doesn't guarantee
MessageMedia future clients, it does plug the firm into one of the Web's most
powerful networks of Web companies. This “keiretsu” mentality has undoubtedly
helped MessageMedia secure relationships with Softbank portfolio companies
E*Trade (also a MessageMedia minority investor) and GeoCities.
Softbank also appears to be stimulating new business for MessageMedia outside
of its Internet portfolio. Back in January, MessageMedia announced that it had
been selected to provide e-mail messaging services to BarclaySquare, the online
marketplace of U.K.-based Barclays. A month earlier, Barclays had announced a
secure payment deal with CyberCash (CYCH), yet another Softbank portfolio
company. Was it a coincidence that two Softbank investments did deals with
Barclays in such a short time frame? I think not. The hidden hand of Softbank
appears to always be at work at numerous levels among its Net holdings.
The conglomerate's venture affiliate, Softbank Technology Ventures, is building
a new Internet incubator in Mountain View, Calif., which will provide office
space and essential Internet services for its young Net startups. This must be
music to the ears of Jones. Let's face it: All of these Softbank portfolio
companies will need e-messaging services. Who better to provide it than
MessageMedia?
Potential clients could also be lurking overseas for MessageMedia. Softbank
unveiled plans earlier this week with the National Association of Securities
Dealers to launch Nasdaq Japan, a new electronic stock market. While this
announcement doesn't immediately impact MessageMedia, it does mean that
Softbank could potentially use MessageMedia to deliver a variety of e-messaging
services to the Nasdaq Japan web site and for listed companies seeking
personalized e-messaging services.
MessageMedia's valuation
At Friday's closing price of 11 7/8, MessageMedia sported a market
capitalization of $511 million. The company's stock price has fluctuated
wildly in a 52-week range between 1 15/16 and 26 3/4. The wild swings are
largely attributable to light average trading volume, scant total revenue, lack
of analyst coverage, and almost non-existent media coverage. That's a lot of
strike for any company to face, much less a Net company. Investors have been
hesitant (with good reason) to place their faith in a Net firm that is trying
to completely change from a secure online payment disaster into a promising
e-messaging firm.
Getting a grasp on a proper valuation for MessageMedia is extremely difficult
because they do not have any publicly traded competitors. In addition, the
firm has been very quiet about disclosing revenue projections to analysts or
the media. However, when compared to various valuation metrics of e-mailbox
outsourcing firm Critical Path (CPTH), a recent high-flying IPO, one can begin
to get a grasp of MessageMedia's relative value. Critical Path's Friday
closing price of 54 7/16 gave the company a market cap of $1.87 billion, more
than triple the value of MessageMedia.
MessageMedia's trailing 12 months of revenue gives the company a price-to-sales
ratio north of 200. Critical Path, on the other hand, sports a P/S of 339
based on Thursday's closing price. Does MessageMedia deserve a higher P/S
ratio then its current levels or does Critical Path deserve the higher ratio
because it is viewed as the undisputed leader in its space? It's a tough
question to answer. In addition, Critical Path has shown more explosive
top-line growth and posted larger sales than MessageMedia last quarter.
Critical Path posted a loss of 77 cents a share on revenue of $1.15 million,
while MessageMedia reported first-quarter sales of $753,527 and a loss of 17
cents a share.
However you slice it, MessageMedia appears pricey when you compare its revenue,
top-line growth and market cap with related Internet firms. However, if you
shift from the position of short-term investor to long-term “venture
capitalist,” the upside to MessageMedia becomes readily apparent. After all,
99% of Net firms are based on future revenue and earnings, and few can argue
that the eventual size of MessageMedia's market will not be staggering. If you
believe Forrester, a $1 billion market is at stake by 2002. So the real
looming question is, will MessageMedia end up the undisputed leader or will it
get nudged from its position at the head of the table?
If you shift into the roll of venture capitalist when analyzing MessageMedia's
stock price, you must also realize that roughly 7 of 10 venture investments are
complete failures. Will MessageMedia end up one of the Web's most daring
turnaround stories or a two-time failure? If Larry Jones has anything to say
about it, he'll have every Internet investor singing “R-E-S-P-E-C-T” in no
time. |
