Stock News, Thursday, 11/04/99
Cornering the B2B E-Commerce Market
By S.P. Brown
Finally, the business-to-business (B2B) e-commerce stocks are getting some of the Internet limelight that used to be reserved for their business-to-consumer (B2C) brethren. It's about time. Estimates vary, but according to Forrester Research, the B2B e-commerce spending will be $1.3 trillion by 2003, up from $43 billion in 1998. This dwarfs the B2C e- commerce market, where Forrester estimates spending will only reach $144 billion by 2003.
That B2B market potential was a big reason why Walter Buckley left the publicly traded venture capital fund Safeguard Scientific (SFE) in 1995 to form the wildly successful Internet Capital Group (ICGE), an Internet holding company actively engaged in B2B e-commerce through a web of partner companies.
Since Buckley took his baby public four months ago, the company's stock has been shooting for the moon. ICGE's IPO was priced at $14 a share and today the stock closed at $154.38. If you're calculating, that's a 1,000 percent return in just four months, producing a market cap for ICGE of $18 billion. Not bad for a company that reported revenues of $7.6 million for the first six months of 1999.
ICGE's business goals are simple, if not ambitious -- to own the number-one company in the top 50 B2B e-commerce markets. So far, ICGE has found and invested in 35 partner companies, occupying 18 of those 50 markets. The partner companies can be separated into two categories within the ICGE scheme: market makers and infrastructure-service providers. On the market-maker side are the likes of e-Chemicals, which provides sales and distribution channels for industrial chemicals; and ComputerJobs.com, a site where information-technology professionals can post résumés and corporations can post job openings.
ICGE's infrastructure-service providers include U.S. Interactive and Blackboard. U.S. Interactive, an Internet marketer and management consulting firm, has led such projects as the re-design of Royal Caribbean Cruises' Web site and the transformation of Network Solutions from a government- sponsored cooperative into a commercial Web site. Blackboard provides the tools that enable universities and companies to host classes and training seminars on the Net.
Of all ICGE's partners, though, publicly traded VerticalNet (VERT) is the most interesting and one of ICGE's largest (ICGE is a 36 percent owner). VERT aggregates buyers and sellers in more than 47 industries or vertical markets. The company generates revenue from charging membership fees for hosting storefronts on its sites (40 percent) and sponsorships (55 percent). Big money is expected to come from taking a percentage of the transactions it enables (currently 5 percent). One of its verticals, Bioresearch Online, did more revenue than Chemdex (CMDX) did last. Revenues for VERT have grown from $965,000 from the first half of 1998 to $5.5 million for the first half of 1999.
To successfully create a portfolio of partnerships like ICGE has requires a certain amount of managerial chutzpa. When ICGE invests in a company, it takes almost total control and creates new business plans, installs new management, and helps with recruiting. "ICG offers these companies a lot more than money," says Henry Blodget, an analyst at Merrill Lynch. "ICG has built a management team that will aggressively help build category killers."
If this aggressive conglomerate-like business model sounds familiar, it should. It's basically CMGI's (CMGI) model, except with an exclusive focus on B2B e-commerce. This focus on B2B e-commerce makes ICGE unique among the new venture capital and holding companies that have sprouted during the Internet boom. What's more, ICGE has copied CMGI's exit strategies of either taking their investments public or selling the companies outright.
And now ICGE is taking its business model across the "pond" to Europe, where B2B e-commerce is just getting started. According to CEO Buckley, "The Internet and Internet commerce is roughly 18 months behind the U.S, but it will be just as much of a land rush there as it is here. We think that Europe represents a huge opportunity for ICG and there's no other company that is as focused on growing B2B companies as we are. That's been true in the States and it's true now for Europe. We see Europe as being the logical next step."
Many investors may be wondering where the B2B e-commerce stocks, including ICGE, have been for most of the year. They've been around, they've just been operating in relative obscurity. Until recently, the sector's been largely ignored by the major Wall Street investment firms. But that's rapidly changing. For example, Goldman Sachs (GS) recently gave its 2-cents on the B2B e-commerce sector with an investor conference and a 400-page report outlining the potential in B2B e-commerce. GS also announced the formation of a B2B investment team made up of analysts who had covered other Internet stocks and enterprise resource planning software firms.
The increased coverage should help ICGE spread the word to investors on the potential and advantages of its industry. Once investors learn that unlike many of their B2C counterparts, upstart competitors to existing B2B companies will have high barriers-to entry once claims have been staked in the several B2B market segments.
Another prime selling point of the B2B companies is their ability to aggregate massive numbers of business buyers and sellers in a centralized, virtual marketplace. Once the B2B companies have integrated their systems into buyers' and suppliers' back-office computing systems, it will be a lot harder to switch to a rival system than simply clicking on a mouse.
Investing with ICGE is probably the safest way to take a position in the fast-growing B2B e-commerce market. According to Hambrecht & Quist Internet analyst James Pettit, "As a business-to-business play, ICGE is the consummate crown jewel in cyberspace." What's more, by indirectly participating in a portfolio of companies through ICGE, investors are instantly diversified against the unsystematic risk normally associated with the frequently volatile Internet sector.
There's one other advantage ICGE offers Internet investors, one that's often overlooked, is a black bottom-line. ICGE is slated to release its third-quarter results on November 11. And though ICGE wouldn't offer any guidance, the analysts surveyed by First Call/Thomson Financial estimate earnings of 18 cents a share for the third quarter. |
