Article where SFTBF, ICGE, VERT, CMGI gets mentioned side by side ...
FOOL ON THE HILL
An Investment Opinion
Is Internet Capital Group Really Worth $20 Billion?
By Bill Mann (TMF Otter)
December 3, 1999
I'm going to tell you a story of a dream. It's pretty simple. A small arm of Safeguard Scientifics (NYSE: SFE) is spun off into its own company in August 1999. This company is comprised of 35 employees, the operating unit, and partial ownership in (at the time) 31 Internet-based business-to-business companies. At the initial public offering (IPO) price of $12 per share the company was worth $1.3 billion dollars. Now, four months later, the company, Internet Capital Group (Nasdaq: ICGE) is valued by the market at more than $21 billion. I am certain that the insiders and shareholders are still trying to shake off the altitude sickness.
ICG is worth a staggering $617 million dollars per employee. This makes even eBay (Nasdaq: EBAY), the poster child for richly valued Internet companies, look positively dowdy by comparison at a market cap of $167 million per employee. Makes me wonder what the people at, for example, Amazon.com ($15 million per employee) and General Electric ($1.5 million per employee) are doing wrong.
So what about this ICG? What makes it so valuable that people are willing to bid it up to absolutely unheard of levels? A brief review of its financial statements doesn't give any indication that this company is all that special, but there again a blind look at any Internet company's financials would likely make investors run away in horror.
From the ICG press release on its 3Q99 results:
"Internet Capital Group reported a loss for the quarter ended September 30, 1999 of $15,274,369 compared to a loss of $4,121,880 a year ago. For the nine months ended September 30, 1999 the loss was $6,404,860 compared with net income of $11,890,856 in the comparable period last year. Results for these periods include significant non-recurring gains from the sale of securities by ICG and the issuance of common stock by its partner company VerticalNet."
The quarterly and nine month revenues for 1999 were $7 million and $14 million, with one-time revenues during each period of $15 million and $47 million, respectively. These "extraordinary revenues" are the key to understanding a company such as ICG. Just like its brethren CMGI (Nasdaq: CMGI) and Japan-based Softbank, the company derives much of its value by taking promising companies under its wing, nurturing them, using its existing stable of holdings to provide strategic partnerships, and then spinning them off through private sale or public offering. In 1999, ICG has held IPOs for three companies, VerticalNet (Nasdaq: VERT), US Interactive, (Nasdaq: USIT) and Breakaway Solutions (Nasdaq: BWAY). The cumulative market value of ICG's stake in these companies is $1.7 billion. One could quickly see how, based on these market holdings alone, how the aggregate of ICG's holdings could be worth $20 billion, if only mathematically.
But wait a minute. Such disparate companies as CMGI, General Motors (NYSE: GM), Berkshire Hathaway (NYSE: BRK.A), and Toronto-Dominion Bank (NYSE: TD) have large stakes of other public companies, and none of them derive 100% of those holdings' value in their market caps. Safeguard Scientifics, for example, holds $3 billion worth of ICG but is only valued at $4 billion for its entire operation. Why does ICG receive full value and then some for its holdings?
Depending on your perspective, one of two words comes to mind: "Potential" and "Insanity." It is most likely a combination of the two.
ICG is in the sweet spot of the latest business rage, "B2B", or "business-to-business" transactions using the Internet as a medium. International Data Corporation estimates that the B2B market will grow from $35 billion this year to $1.1 trillion in 2003. That is a large market for companies to address. But what about ICG, in particular, makes investors believe that it is so well positioned that it can be valued at 328 times current revenues?
B2B is not a new concept. Dell (Nasdaq: DELL), Gateway (NYSE: GTW), and certain CMGi properties, to name a few, have already been providing market-making efficiencies to their respective markets for a number of years. ICG seems to have caught the public's fancy just at a time when B2B got its buzz -- in the summer of this year.
But public fancy is no way to Foolishly evaluate a company and its prospects. The company must, in the end, show the ability, or the potential even, to turn a profit. In the end, this is where ICG falls dangerously short of the unreasonable expectations placed upon it by shareholders. It is a company focused upon a market that does not yet exist, comprised of three dozen units that are trying to compete with the hundreds, or even thousands of other startups or existing companies focusing on the same potential market.
B2B will likely end up as an absolutely huge commercial market, as companies use the Internet to streamline their transactions with vendors and customers. But huge how? Are these market makers really going to save companies so much money that they will net $1.1 trillion in revenues by 2003? That is nearly the gross domestic product (GDP) of France, a staggeringly large number. No, more likely is that the market makers would receive a very small portion of this market amount. The majority of the market would manifest itself as cost-savings for the companies actually doing the transaction. So much as eBay cannot count the value of the goods that pass through its system as "revenues" neither can B2B companies count on this amount of income.
ICG may end up being a prominent player in this market, but it is competing not only against existing deep pockets in CMGi and Softbank, but also against those entities that will come afterward. In hindsight, ICG left billions of dollars on the table by having its IPO at such a low price level, and as such does not have the internal financial resources that would otherwise be available. The company will have to look to additional equity sales to raise additional funds, either through private placement or a secondary offering.
All of these factors add up to point to a massive overvaluation of ICG. The company may, in the end, prove that it deserved its market cap, but right now it is valued very richly on a series of unproven concepts manifested in small unprofitable companies run by unproven management teams in a speculative market. It is a company that, even at a quarter its value, would be the highest of high-risk investments. As it stands, it's just nuts. |
