DJN: WSJ(2/17): AltaVista Warns CMGI's Stake May Stop Acquisition
By Jon G. Auerbach
Staff Reporter of The Wall Street Journal
Many Internet companies dream of being acquired for big bucks. But Internet
portal AltaVista Co. might be forced to tell suitors to get lost.
AltaVista, which is planning a public offering in the next several months,
warns investors in its registration filing that a 60-year-old securities law
may effectively prevent the company from being purchased after the IPO. Such
a situation could make AltaVista, Palo Alto, Calif., a less attractive
stock, because takeover speculation and industry consolidation are major
factors fueling the current Internet stock fever.
AltaVista, in a standard section of the filing devoted to "risk factors"
facing the company, says its hands are tied because its 82% owner, Internet
conglomerate CMGI Inc., Andover, Mass., may need to retain its majority
stake to avoid being treated by the Securities and Exchange Commission as an
investment company, or mutual fund.
Such treatment would have onerous implications for CMGI, such as requiring
the company to reincorporate itself and attain shareholder approval of
employment contracts for top executives, according to SEC officials and
securities lawyers. It would also be subject to impromptu SEC regulatory
visits without court orders. CMGI acquired its stake in AltaVista from
Compaq Computer Corp., Houston, in August -- after the IPO, CMGI will own
about 74% of AltaVista, and Compaq will own about 16%.
Alan L. Dye, a securities lawyer at Hogan & Hartson, Washington, said most
companies avoid being treated like a mutual fund at all costs because of
strict disclosure regulations and greater shareholder rights.
David Emanuel, an AltaVista spokesman, said the filing "speaks for itself."
CMGI's chief financial officer, Andrew J. Hajducky, said there is no risk of
CMGI being treated as an investment company. "We are an operating company.
Period." However, Mr. Hajducky said he hasn't "done the calculations" to
determine if selling AltaVista would put CMGI above the law's threshold.
Investment bankers have said that the threat of mutual-fund regulation is
one of the forces impelling CMGI's recent desire to expand its operations
through acquisitions such as AltaVista. Another reason to believe that CMGI
will continue to be an aggressive Internet buyer is also disclosed in the
filing.
Under an agreeement between Compaq and CMGI, Compaq preprograms some of its
keyboards with a button that says "Internet" -- and sends the computer user
straight to the AltaVista site. This accounts for between 5% and 10% of
AltaVista's traffic each month. However, the filing says Compaq can
terminate the agreement if AltaVista drops below the No. 12 position for
four consecutive months in Internet audience figures kept by Media Metrix
Inc. Since June, AltaVista has slipped two spots to No. 12. To stay in the
top 12, CMGI or AltaVista may have to grab more traffic by making more
acquisitions such as AltaVista's recent purchase of financial Web site
Raging Bull.
Under the Investment Company Act of 1940, a corporation becomes an
investment company if its investments represent 40% of the company's total
assets, not including government securities and cash.
For CMGI, the situation has arisen because its venture-capital operations
have delivered huge returns in recent years, based partly on early
investments in Lycos Inc., GeoCities and Engage Technologies Inc. CMGI had
about $5.4 billion in total assets at the end of October and investment
securities of about $1.7 billion. If CMGI's ownership of AltaVista drops
below 50%, the company could break the 40% threshhold.
In its filing, AltaVista said the SEC regulations might motivate CMGI to
"maintain at least a majority ownership position in AltaVista, even if other
stockholders of AltaVista might consider a sale of control of AltaVista."
The government filing adds that CMGI's ownership may "have the effect of
delaying, deferring or preventing a change in control of our company or
discouraging a potential acquirer from attempting to obtain control of us."
Such an action, AltaVista said, "could adversely affect the market price of
our common stock."
(END) DOW JONES NEWS 02-17-00
12:01 AM
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