Stephen, here it is, enjoy.
Regards,
Tom
January 10, 2000
Barron's Features
Vertigo
The new math behind Internet Capital's stock price is
fearsome
By ANDREW BARY
In the five months since its initial public offering, Internet Capital Group has
ridden the craze for business-to-business e-commerce to become the
third-largest Internet company in the stock market, with a market value of
$48 billion, trailing only America Online and Yahoo. Internet Capital, a
holding company that owns stakes in 47 business-to-business 'Net outfits,
amounts to a publicly traded online venture-capital company. Its market
capitalization is roughly the size of that of Amazon.com and eBay
combined, and is bigger than those of many Old Economy companies,
including Gillette, Boeing and General Motors.
Since going public at a split-adjusted price of $6 a share on August 5,
1999, Internet Capital has soared to 174, after trading as high as 212 just
before Christmas. The stock is up sharply since mid-December, when the
company raised over $1 billion in the largest financing ever for a 'Net
company. It sold six million common shares at $108 and $475 million of
convertible bonds.
Four-year-old Internet Capital, based in Wayne, Pennsylvania, isn't as
well-known as AOL, Yahoo and Amazon, but it has been embraced by
many investors, mostly individuals, who want a pure play on the potentially
monstrous business-to-business Internet market, which bullish forecasters
have said could ring up $1.3 trillion in U.S. sales in 2003, versus just $43
billion in 1998.
But even the company's Wall Street fans admit that Internet Capital trades
at a huge premium -- 1,100% -- to the current value of its investments,
which consist primarily of stakes in Internet market makers serving a range
of industries, including plastics, paper and chemicals. Nearly all the
company's investments are still private.
Skeptics are far less charitable, maintaining that the company epitomizes
the absurdity of Internet valuations and that its stock could collapse if the
current business-to-business (B2B) mania ever cools, or if many of
Internet Capital's investments sour.
"The odds that a few of their investments may return 1,000% or more are
pretty good, but not all of them," says David Simons, managing director of
Digital Video Investments in New York. "Look at the customer service
and shipping problems that are plaguing e-tailers. The same intrusion of
reality will dawn on investors regarding the B2B companies."
For a company with a $48 billion market value, Internet Capital's actual
investments are astonishingly small. Through the middle of December, the
firm had put $331 million into what it calls "partner" companies. The
individual investments have often been quite modest -- about $7 million, on
average -- to buy stakes averaging about 30%.
And even if each investment rises a stunning 100-fold, the value of the
company's investments would total around $33 billion (100 times $331
million), or $120 a share, appreciably below the current market price. This
very generous calculation doesn't even factor in corporate taxes that likely
would be due on the monetization of any investment.
Internet Capital has scored some coups so far, most notably a $14 million
investment in VerticalNet that's now worth $1.8 billion, based on
VerticalNet's soaring stock price. But the company is going to need
dozens of these successes to justify its stock price.
Most of Internet Capital's investments were made in 1998 and '99. In fact,
about half of the $331 million has been put to work since last September
30. And the majority of Internet Capital's partners are early-stage
companies with minimal revenues. Some amount to little more than
start-ups. Internet Capital's operating revenues in the first nine months of
1999 were $15 million.
The company's valuation, of course, reflects optimism about the B2B
market and confidence in the company's management, led by co-founders
Walter Buckley, 39, and Ken Fox, 29. The pair are each worth close to
$2 billion, based on their equity stakes. Bulls bet that Internet Capital will
continue to make lucrative B2B investments with its current $1 billion-plus
war chest.
In an interview Friday, Fox and Buckley characterized their company as
the "General Electric" of the sector. Fox said the company already owns
stakes in B2B marketmakers in 26 major global industries and is targeting
many of the remaining 24 large industry groups. "We think the B2B wave
will be the largest wave ever in technology," Buckley said.
But there is plenty of competition to make B2B investments. CMGI, the
best-known Internet holding company that owns a big stake in Lycos, is
turning its attention to the B2B market, as is much of the Silicon Valley
venture-capital community.
Internet Capital's Wall Street fans are led by Henry Blodget, Merrill
Lynch's Internet analyst, who wrote recently that the company "is quickly
establishing itself as the leading land baron" in the B2B market. Internet
Capital, it should be noted, is Merrill Lynch's biggest Internet underwriting
client by a wide margin.
Blodget's analysis values Internet Capital's
assets at about $15 a share, or $4 billion.
Blodget has acknowledged that Internet Capital "isn't inexpensive" but he
remains bullish because of the strong outlook for B2B companies and the
prospect of investment dollars shifting into the sector. Internet Capital is the
biggest and most liquid B2B play.
Fair enough. But Internet Capital trades at 11 times its estimated asset
value, while CMGI, the other big 'Net holding company, trades at less than
three times its estimated asset value.
In a recent report, Blodget argues that his asset-value calculation for
Internet Capital is conservative because it values the company's stakes in
B2B outfits that may come public in the next year at their projected
offering prices, not their potentially lofty trading levels after the IPOs.
Moreover, he values all the private development-stage companies at cost,
which could be substantially less than their eventual public-market values.
A recent analysis by Goldman Sachs of Internet Capital exemplifies the
new math -- and some would say shoddy nature -- of Internet research
these days.
Goldman projects that B2B companies will reach an amazing $2.5 trillion
in market value in the next few years, 10 times the size of the current
business-to-consumer market and 2.5 times the current size of the entire
Internet sector. Goldman then assumes that Internet Capital Group will
command 15%-20% of that $2.5 trillion market, or around $500 billion.
Adjust that $500 billion for Internet Capital's average ownership stake of
30% in its 47 investments and the company gets valued at $150 billion. A
discounted value of that $150 billion produces a current valuation range of
$50-$75 billion, the Goldman analysts say.
Internet Capital bills itself as more than just a passive investor. It aims to
provide strategic guidance and customer support, as well as to foster
collaboration among the various companies. Goldman calls this
collaborative approach the "special sauce."
The company has focused on buying stakes in marketmakers in various
industries, including chemicals, paper, plastics and, most recently, steel.
Through the Internet, these market makers are aiming to facilitate
commerce and lower costs for traditional businesses. The hope is that the
marketmakers will become toll booths, taking a small cut of each
transaction over their networks, much the way eBay takes a slice of
transactions on its auction site.
Wall Street so far has been receptive to several Internet B2B
marketmakers, including FreeMarkets, Chemdex and SciQuest, despite
their very modest revenues.
David Simons cautions that despite all the hype about B2B possibilities, the
upstart market makers may have a tough time quickly changing established
business practices, which may be less inefficient than fans of
business-to-business Internet backers believe.
Internet Capital also faces stiffer competition from other potential investors
in B2B companies as it seeks to make larger investments. In late
December, the company made its largest single investment to date, paying
$180 million in stock and cash for a roughly 35% stake in MetalSite, an
e-commerce site focused on the steel industry. The seller was Weirton
Steel, which retained a 20% stake. Internet Capital's purchase effectively
valued Metalsite at roughly $500 million.
Bulls like Blodget project that MetalSite could eventually be worth $6
billion, valuing Internet Capital's stake at $2 billion. That estimate,
however, could be way too optimistic. Weirton Steel admittedly was a
motivated seller because of its financial troubles, yet it presumably wouldn't
have parted with such a sizable stake in MetalSite if it felt the business was
worth 10 times as much as Internet Capital paid. Indeed, if MetalSite
eventually is worth $6 billion, it would be worth about as much as the
entire U.S. steel industry.
Another example of the new Internet math is eMerge Interactive. In
November, Internet Capital paid $48 million for a roughly 30% stake in
the firm, which operates an online marketplace for cattle, in a deal that
valued eMerge at $160 million. A month later, eMerge filed a registration
statement for a public offering that would value the company at around
$400 million -- this despite the fact that the firm's prospectus suggests that
the company got involved in livestock e-commerce only last year, with the
purchase of a couple of Websites, including Cyberstockyard, for a total of
$5 million.
Like many Internet companies, Internet Capital has a limited float (the
number of shares in public hands). The float is less than 15% of the 275
million outstanding shares.
Potential investors ought to be aware that starting in February, a significant
amount of stock held by insiders will become available for sale. Over 46
million shares will become eligible for sale in February, another 45 million
from March through May and an additional 95 million in June. The
company said last month that a "significant number of these shares will be
sold when eligible for resale," meaning the market will have to absorb a lot
of stock in the next few months.
Based on the supply overhang and its enormous current valuation, Internet
Capital could be worth substantially less than its current $48 billion by
midsummer. |
