By Peter D. Henig
Redherring.com
September 24, 1999
Ah, the sweet smell of money -- there's nothing like it. But in the business-to-business (B2B) space, that smell is stinking up the
place.
[an error occurred while processing this directive] The initial public offerings market has once again gone mad with Internet
fever, this time in the B2B sector, awarding Ariba Technologies (Nasdaq: ARBA) and the Internet Capital Group (Nasdaq:
ICGE) (ICG) with multibillion dollar valuations. The market lost its head even sooner, it seems, than it previously did for
Internet IPO standouts such as eBay (Nasdaq: EBAY), eToys (Nasdaq: ETYS), or Amazon.com (Nasdaq: AMZN). And
now that the white-shoe investment firm Goldman Sachs (NYSE: GS) has given the sector its own
good-investment-housekeeping stamp of approval -- predicting B2B electronic commerce will yield $1.2 trillion in business
over the next five years -- it appears headed for even sweeter-smelling pastures.
Or is it?
WHO'S BETTER?
For the moment, the B2B market is overcome with glee. Calico Commerce (Nasdaq: CLIC), a hot B2B
software company, is on deck for a monster IPO, underwritten by Goldman Sachs. More B2B offerings
are sure to follow. Stocks like Verticalnet (Nasdaq: VERT) and Chemdex (Nasdaq: CMDX) are
recovering from their post-IPO hangover with verve. And the B2B-focused Internet Capital Group, with a
market cap of $12.25 billion, has just surpassed Internet market leader CMGI (Nasdaq: CMGI), with a
market cap of $7.86 billion, for top billing among publicly traded venture capital funds.
The valuations are crazy. As a proxy for the future success of an entire sector, the market is piling all
potential B2B riches onto the few stocks already public.
"It's a little like the first five Internet stocks," says Brad Garlinghouse, general partner with CMGI's @Ventures. "Are these
markets truly efficient or rational? It seems like an aberration to me."
Using CMGI and ICG as examples of how the Internet and B2B sectors differ, Internet analyst Steve Harmon, CEO of Net
stock analysis site E-harmon.com, argues that the market is not only acting irrationally in valuing B2B IPOs, it has completely
misunderstood the fundamental difference between investing in B2B versus B2C (business to consumer). With 45 wholly
owned or portfolio Internet investments worth approximately $11.25 billion, Mr. Harmon argues that even at face value, CMGI
-- a consumer-company specialist -- is well worth its market cap, compared with ICG's 35 B2B investments, which Mr.
Harmon roughly calculates are worth $8.75 billion
Although ICG is fully focused on B2B, which occupies only 25 percent of CMGI's portfolio, the best thing going for ICG so far
has been its success with Verticalnet; and with that, its investment stake is modest even given Verticalnet's $1.2 billion market
cap. Does this justify ICG's $12 billion market cap? According to BancBoston Robertson Stephens analyst Eric Upin, it does.
In initiating coverage of ICG with a Buy, Mr. Upin was willing to call it one of the top Internet B2B plays to watch for the next
millennium.
By contrast, CMGI owns and operates ten Internet companies, six of which are in part, or in full, dedicated to B2B. These
include Engage Technologies (Nasdaq: ENGA) and Altavista. Among its 35 other portfolio companies, CMGI's @Ventures
investing arm has stakes in a wide variety of B2B plays, either in what CMGI calls the "traditional infrastructure and enabling
technologies sense," or in the "newer vortal, or vertical exchange, sites." These include such recent IPO standouts as Critical
Path (Nasdaq: CPTH) and Chemdex, as well as still-private companies Bizbuyer.com, Intelligent Digital, Promedix.com,
Speech Machines, and Visto. And, according to Mr. Garlinghouse, @Ventures will be increasing the percentage of B2B
companies in its portfolio from 25 to 40 percent.
"When I look around the Internet landscape, ICG is one of the most overvalued Internet properties I've ever seen," says the
@Ventures partner.
B2B OR NOT B2B?
The other interesting trend within the B2B space is not necessarily who's winning or losing, but what's happening as a result of
the euphoria; the sense once again that anything Net, especially in the B2B space, is invincible.
Mr. Garlinghouse confirms that he's been approached by at least three Internet-focused VC firms specializing in B2B that are
now hoping to go public. Yet he is still not convinced that the magic formula is to throw a couple of Internet investments in a
pot, bring them to a boil, and expect billions to pour out as a result. "Investing in these companies is about learning and
synergies, something that is often easier to do in B2C than in B2B, where each industry is different and has different processes,"
he says.
Henry Blodget, an Internet analyst with Merrill Lynch (NYSE: MER), agrees. "The B2B opportunity should be large, but it's
going to be a lot more fragmented than anyone ever expected," he says.
For that reason, Mr. Blodget and other investors are understandably ambivalent and irrational in how they are throwing their
money at the sector. "Don't forget, ICG is just a call option on B2B," says Mr. Blodget."No one knows how to play it and
know one knows how big it's going to be."
One small fund that's off the radar but that could also be worth playing in the B2B market is Virtualfund.com (Nasdaq: VFND),
an Internet investment company based in Eden Prairie, Minnesota. Virtualfund.com is another mimic of ICG or CMGI. Even
with a market cap of just $25 million and billboard stock market status, Virtualfund.com is hoping that it, too, will reap the
billion dollar rewards of being in the right sector at the right time, when investors have only just begun to toss money, rationally
or not, at B2B opportunities. |
