Where's the beef in B2B?
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.
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. |
