From Jim Seymour in today's TSCM:
The Perils of Betting On 'Concept Companies'
By Jim Seymour
Special to TheStreet.com
10/24/00 2:00 PM ET
I want to wrap up this series of Bottom-Fishing Journal columns with a look at what I think is the most dangerous kind of bottom-fishing buy: a "concept company." And I want to do it by contrasting two very different companies, both arguably of the concept persuasion, both perhaps worth gambling on. But let's just say they're scary investments.
The two companies are Webvan (WBVN:Nasdaq - news - boards) and WebMD Corp. (HLTH:Nasdaq - news - boards), formerly Healtheon-WebMD. Let me start with the latter, which has grown from an initial merger of Jim Clark's original Healtheon concept and the WebMD site.
Jim began Healtheon four years ago by going around Silicon Valley and drawing a little diagram for potential investors. As documented in Michael Lewis' The New New Thing , Clark would first draw four little circles, in what became his near-legendary "Magic Diamond" pattern. In one, he'd write "consumers," in another "providers," in yet another "doctors," and in the fourth, "payers."
Then he'd draw little lines to the center of the diamond from each circle, and there he would draw another larger circle, labeled "Healthscape" -- his original name for what became Healtheon. At the intersection of those four communities, Jim would argue, lay an immense opportunity to integrate and coordinate a fundamentally broken American health care system.
It was nuts for consumers of health care to have to repeatedly fill out long medical history forms every time they saw a new doctor. It was nuts for doctors and patients both to have a huge hassle about submitting health care claims to insurers, then to have to wait, in a sort of suspended animation, for reimbursement. It was nuts that in emergencies our medical records could not be summoned from a single, central source.
The company Jim wanted to build, at the intersection shown on that diagram, would solve all of those problems. It would connect disparate systems, overcome technical issues, help doctors get paid more quickly and patients get better care. Maybe even help the health insurance community hold down costs, in turn holding down employers' premiums.
This was a $1 trillion industry. Nearly everyone agreed that it was broken. There had to be money to be made by fixing everything.
So Jim rustled up $20 million of venture capital money, and threw in another $20 million of his own. And then he went out and hired a classic cadre of Valley "smart guys" -- and told them to figure out how the company ought to work.
Now that is a concept company: a notion, no more, formed by a guy who had already built two big, successful, valuable companies (Netscape and Silicon Graphics) -- a concept that he didn't deign to flesh out but in effect farmed out to a bunch of hired hands.
Healtheon went public in February 1999. At opening, the stock quadrupled from its initial pricing at $8, and ended the day around $30. By late that May, it closed over $100 -- and hasn't seen that level since.
You know what followed. Healtheon stumbled around, in the process falling to Monday's $12 and change. Janus Funds bought 15 million shares at a discount in March, for about $62, for a total $930 million and has proceeded to lose a bundle of its investors' money. (Those restricted shares are now being registered with the SEC for sale.) And News Corp. put in about $1 billion, also now worth much less.
Late last year, with no relief from its losses in sight, Healtheon merged with WebMD, Mede America and Greenberg News Networks. Other companies have subsequently been acquired. Subsequent management changes have left Marty Wygod, who founded Medical Manager, one of the many companies gobbled up by WebMD, in charge. Jim Clark is gone, off the board as of two weeks ago.
Maybe someday Healtheon-WebMD will make money. But it must deal with several realities:
There were already substantial medical-data-exchange programs in place.
Nearly every health insurer already had (admittedly incompatible) electronic billing and payment systems in place -- indeed, they often browbeat physicians and other health-care providers to use them -- or else.
It was, and still is, perceived by many insurers to be to their advantage to keep both their insureds and those who treat them in the dark on many aspects of their care, and who gets paid what for it.
I could go on. In practice, the concept behind Healtheon was fundamentally flawed, perhaps fatally flawed. And shareholders have paid the price for the hubris of those sketches on cocktail napkins.
Jim Clark is a genius, a creator of massive value, a seminal figure in entrepreneurship, 1990s-style. But he doesn't always hit it out of the park. And if you choose to speculate in WebMD, be prepared for a long and bumpy ride before you can get out with a profit.
Meanwhile, a few miles down the road, Louis Borders had sold his successful Borders bookstore chain. He was interested in starting, first in the Bay Area, a company that would deliver groceries in response to consumer orders placed over the Web. With the help of expensive consultants and some smart staff hired for their expertise in logistics, he began in 1999 developing a system using huge, high-tech warehouses and a presumably efficient fleet of trucks and drivers.
Consumers could order online, from a wide array of fresh and packaged food products. A truck would arrive with their purchases the same day, within a half-hour window they specified. Prices would be competitive. The staid, low-margin grocery business would be turned on its ear.
The company would come to be called Webvan.
Eventually George Shaheen was persuaded to come aboard as CEO and chairman. Shaheen, famous as the organizing force behind its consultants' decision to depart a bean counter-dominated Arthur Andersen, walked away from many the millions he would have earned if he'd held on until the separation was complete this past August. But, hey, he got a bonus of up to 5% of Webvan to make the move, and with any luck, Webvan would make him far richer.
You know the rest: Webvan is still very much in business, but way behind the profitability curve of its own business plan, and in big trouble. It is trading at just over $1. Louis Borders is gone, off the board as of a month ago; Shaheen remains in charge.
That's a concept company, too.
It has a great reputation among its customers, who, according to Webvan, are gradually -- but too gradually -- becoming habituated: In its most recent quarter, the average Bay Area WBVN customer order was $103, but that mythical average customer ordered from the company only about once a month. Both figures, especially order frequency, have to improve if Webvan is to become a success. With average orders about 10% higher, and with those average customers ordering weekly, Webvan has a shot at making money.
It's hard to see how either company, with so many obstacles in their way, gets to profitability. Both are very risky investments.
The big question for HLTH is focus: Does it know yet what it wants to be when it grows up? Can Wygod make something coherent of the hodgepodge of companies he has inherited? Was Clark's dream too grandiose?
The big question for Webvan is capital: Will the market give it enough time and capital to get to profitability, or will it die before it reaches that Nirvana? Right now, Webvan says it has about $375 million in the bank, and can hold on, with reduced spending, until the fourth quarter of calendar 2001.
As readers know, I have been a fan of Webvan almost since the beginning, and I still have hopes for it. I think it's an interesting bottom-fishing play because, of course, any sizeable move up from its present buck-and-a-quarter price could produce a huge return for those who get in around this level.
And WebMD? I admired Clark's plan -- it was a seductive notion -- and I certainly agree that bringing coherence to the American health care system is both a noble and maybe a profitable venture. But I'm skeptical, especially at these prices. If HLTH were trading for a couple of bucks, I'd probably be interested, but around 12, count me out.
If there's a moral here -- and I agree that it is a minor moral, obscured by a lot of huffery-and-puffery from both companies -- it's that bottom-fishing among concept companies is an extremely risky proposition -- especially if a beaten-down company has only a hazy view of its role, and how to fill that role.
I might play Webvan. I wouldn't touch WebMD. |
