Off topic - (long) NYT article about CMGI.
December 10, 2000
CMGI Can Defy Gravity Only So Long
By SAUL HANSELL
First came the flashing video
images. Then the dancers in
psychedelic body paint, the
New Age pianist, the opera singer in
a white fur stole who descended on
a construction crane and three men
in gas masks who banged on
garbage cans to disco music. White
smoke billowed. Finally, the lights
went up to reveal the Boys Choir of
Harlem, singing spirituals.
This sumptuous show last fall at the
Hammerstein Ballroom in Manhattan
represented the avant-garde not of
theater but of Internet hype. It
introduced a new home page and ad
campaign by AltaVista, the search
engine, to about 100 journalists and
Wall Street analysts, and laid the
groundwork for an initial public
offering. AltaVista — prompted by
its new owner, CMGI, one of the
most successful incubators of
Internet companies — promised to
take on Yahoo with "a portal as
powerful and immediate as life
itself."
To do so, it would spend $120
million on a new slogan, "Smart is
beautiful."
These days, that strategy does not
look very smart, and the prospects
for the CMGI empire are not very
beautiful.
Hopes for AltaVista's offering were
dashed by the tumble in Internet
stocks last spring. CMGI is closing
other units, laying off employees and
facing tough questions about the
viability of the business behind the
flashing lights and new-economy
rhetoric.
In recent weeks, an increasing
number of investors, analysts and
even CMGI executives have
wondered aloud whether David S.
Wetherell, CMGI's chairman,
founder and driving force, was too
emboldened by his early success —
largely investments in some
pioneering Internet companies that
earned stratospheric returns. Now
that the market will not let him profit
by taking companies public, these
skeptics are asking whether CMGI
has the vision, strategy and
management skill to make its
sprawling portfolio worth even the
sum of its parts.
"CMGI was the ultimate bull market
creation," said Gene DeRose,
president of Jupiter Media Metrix,
the research company. CMGI, he
said, claimed credit for what was
just extraordinary good luck. "It
epitomizes strategy in hindsight," he
added, "rather than a disciplined
process for incubating and managing
companies."
Mr. Wetherell, 46, says the company
is taking the steps that are needed to
thrive in tough times. "Our
foundation is solid and mission is
clear," he wrote by e-mail. "After
five years of hypergrowth, we, like
the market over all, are taking a step
back — planning the coming steps
and phases that can and will maximize growth and enhance investor support."
A year ago, CMGI was the model incubator, a new corporate creature
somewhere between a conglomerate and a venture capital fund. It started
some companies, invested in others and kept operating control of many,
hoping to take all of them public. Mr. Wetherell was hailed as the "Warren
Buffett of the Web," by The Daily News of New York, and CMGI ended
1999 with a market value of $41 billion. It was the best-performing United
States stock of the preceding five years, returning 4,921 percent.
In its fiscal year ended July 2000, CMGI lost $1.4 billion on revenue of $898
million.
Today, CMGI's main companies, like Alta Vista and Engage Technologies, an
Internet advertising business, are scaling back. The chief executives of both
of those companies resigned recently. Smaller companies are being sold or
merged. And CMGI's shares are off 91 percent this year, to a value of about
$3.8 billion, closing on Friday at $11.94.
"A year and a half ago, people were saying this was the best business model
ever," said Vik Mehta, an analyst at Goldman Sachs. "Now the financial
markets are telling them they will go out of business."
Mr. Wetherell, whose 11.2 percent stake in CMGI is now worth just $430
million, still has defenders. They say he is a tough executive with an eye for
financial detail, but he also understood that the early days of the Internet
demanded growth, not profits.
"Most people thought he came by all this by accident, but he is a guy who
has been very thoughtful and very strategic early on," said David Bohnett,
co-founder and former chairman of Geocities, the online community that was
one of CMGI's greatest successes. "You can't blame him for taking
advantage of the opportunities in a bull market."
Mr. Wetherell declined to be interviewed for this article, choosing instead to
answer some questions by e-mail. And he ordered many CMGI directors and
executives not to respond to interview requests. But more than 20 current or
former directors and executives, all of whom insisted on anonymity, were
willing to discuss CMGI and Mr. Wetherell. Several former employees also
took the risk of speaking, despite the confidentiality provisions that CMGI
regularly writes into its severance agreements; they, too, requested
anonymity.
From those interviews, a new picture emerges — not so much of a company
working from a visionary blueprint but of one in which decisions on
everything from hiring to strategy are made on the spur of the moment —
and reversed just as fast. Many moves were made largely to generate
optimistic news releases, helping the stock to surge, the executives said.
Some companies were started on a whim, and when they failed to fulfill Mr.
Wetherell's grand hopes, they were transformed, renamed or merged. Of
CMGI's 15 majority- owned companies at the beginning of the year, four
were merged into other CMGI entities and two were closed. Of 40
companies in its venture capital portfolio, five were closed and four were
sold.
Indeed, even as incubators have been promoted as a way to merge
small-company entrepreneurialism with big-company resources, it is not clear
that having CMGI as a parent is worth the trouble. The effort to encourage
intra-company deals results as often in unpleasant compromises as it does in
powerful synergy, executives said. And the oversight from CMGI
headquarters in Andover, Mass., has limited value, they added, because Mr.
Wetherell seldom hires experienced managers. Most of the few
large-company veterans who signed on, like Neil Braun, the former president
of NBC Television, and Jeff Cunningham, the former publisher of Forbes,
left within months.
"CMGI is one of those great transitional companies that is not meant to last,"
one former top CMGI executive said. "They were meant to aggregate all the
buzz of the new economy. They are not a General Motors but a Tucker" — a
reference to the failed upstart auto company memorialized in Francis Ford
Coppola's 1988 film.
Mr. Wetherell contends that CMGI is far more than a dream.
"I try to use technology to solve tough problems that have broad market
appeal," he wrote. "This provides high barriers to entry, providing there is a
first-mover advantage and proper leverage from other CMGI companies.
When all of these elements exist, we have a formula for success."
The Beginnings
From Mailing Lists to the Internet
In its short history, CMGI achieved astounding returns by staying one step
ahead of the Internet explosion.
In 1994, CMG Information Services was a tiny company that sold mailing
lists of college professors to textbook publishers. Mr. Wetherell, who started
out in computer programming, acquired the company in a leveraged buyout
in 1986. In trying to sell books online in 1993, it developed what became one
of the first Web browsers, Booklink, which it sold a year later to America
Online for stock it later sold for $70 million.
With that windfall, Mr. Wetherell began investing in other Internet
companies. In its most significant move, Dan Nova, the only CMGI
employee with venture capital experience, bought a search technology from
Carnegie Mellon University for CMGI that became the basis for Lycos, now
the Web's fourth-biggest site.
Mr. Wetherell also invested in Geocities, which enabled people to build home
pages about their interests. He sold it to Yahoo in 1999 for $3.6 billion. But
early on, he wanted to be more than an investor. So he started a series of
companies that CMGI incubated, most based on the premise that the Web
created the ideal environment to merge advertising and direct marketing.
Engage, for example, was started in 1995 as a network of sites that would
keep track of the topics that interested users, though not of who they were.
A Web-surfing soccer mom would then see banner ads for minivans, while
an aging stockbroker would see sports-car pitches.
As his investments expanded, the potential grew for CMGI's companies to
cooperate with one another.
But it was just as likely for them to compete, and conflicts arose quickly. Mr.
Wetherell announced, for example, that Geocities would contribute
information about its users to Engage's data base, but Geocities spurned his
pressure to do so. And he started Planet Direct, which offered a
comprehensive Web portal — seemingly a direct rival of both Lycos and
Geocities, though it sought partnerships with each. Many executives at
CMGI's Web site service companies complain that they were subjected to
extraordinary pressure to do unattractive deals with corporate cousins.
Mr. Wetherell wrote that CMGI's policy was that companies deal with one
another at arm's length.
The conflicts rose to a grand scale in January 1999, when Yahoo made an
unsolicited bid for Geocities. Mr. Wetherell tried to orchestrate a combination
with Lycos instead, but when he could not reach an accord with Robert
Davis, Lycos's strong- willed chief executive, he backed the Yahoo bid.
"It was like a food fight," one bemused Geocities board member said. "Bob
wanted to do what was good for Lycos, and Dave wanted to do what was
good for CMGI."
Indeed, several Geocities directors said Mr. Wetherell notably did not recuse
himself from voting on the merger transactions, despite the seeming conflict
of his serving on Lycos's board.
Mr. Wetherell says he offered to recuse himself but the board did not ask him
to; his pressure, he added, encouraged Geocities management to conclude the
deal with Yahoo rather than accept a lower bid from another company.
These issues burst into public view the next month, when Lycos agreed to
merge with the Home Shopping Network and other properties controlled by
USA Networks. At a board meeting, one member recalled, Mr. Wetherell not
only voted for the USA deal, but also stood up and applauded when it was
approved.
Two days later, after Lycos's shares plunged 31 percent, Mr. Wetherell
voiced public doubts about the merger; he soon resigned from Lycos's board
and fought successfully to have the deal aborted.
To the public, it was a curious display of indecision, but to those who knew
Mr. Wetherell, it was a reflection of impulsiveness. "Dave was a big believer
in riding the wave," said a former chief executive of a CMGI company. "If
auctions became hot, he would demand that auctions be front and center.
Now."
Mr. Nova, the venture capitalist who worked at CMGI early on, said the
market rewarded Mr. Wetherell's instincts. "The rising tide covered up any
mistakes we may have made," he said. "Every spreadsheet we ran at the time
was off by a magnitude of five or six times. No one expected Lycos and
Geocities to be worth billions."
And Mr. Wetherell, an eye on the market, was convinced that speed and
growth were paramount. Inside CMGI, employees summarized the strategy
with the initials G.B.F., for Get Big Fast. "At our management meetings," one
former executive said, "any time Dave heard of a deal or other good news, he
would say, `Sounds like a press release to me.' "
To maintain momentum, Mr. Wetherell needed Wall Street. "The currency he
did deals with was his stock," one former executive said. "Keeping the stock
going was a theme that went through a lot of our conversations."
The Upswing
Expansion Binge Brings Strains
Mr. Wetherell's success at killing the Lycos-USA merger, and the resulting
publicity, appeared to embolden him, former executives said. The company's
surging stock price, along with the cash it made from selling Yahoo stock it
received for Geocities and from other investments, allowed him to embark on
an expansion binge. CMGI bought 18 companies in 1999 and 5 more this
year.
The expansion was a strain. CMGI hired a head of human resources and
created strategy and business development units, but Mr. Wetherell continued
to make the key decisions.
"When I got inside, it was clear they weren't really an operating company,"
one former senior executive said. "They didn't have guys who could sit
across the table and say, `I have seen this before.' "
Another former executive described CMGI headquarters as a "giant chicken
with its head cut off."
"They were working crazy hours, but it would take a long time to get things
done," he added.
Mr. Wetherell wrote that CMGI is shifting the sort of executives it hires from
"entrepreneurial types" to those with broader experience. But some of those
hired from big companies did not work out because they found the Internet
to be "foreign territory."
All last year, Mr. Wetherell kept pressing companies for growth and talked
often of taking on America Online, Yahoo and DoubleClick. But there were
signs that the slingshots of CMGI's giant-killers were empty.
Consider the effort to best AOL through Planet Direct. It was meant to
provide content and services in partnership with providers of Internet access,
like telephone companies. But the company attracted few service providers.
As the business languished, Mr. Wetherell pressed management last year to
spend $100 million to buy another company that would transform Planet
Direct, renamed My Way, into something else. Earlier this year, My Way
bought Zip2, which operates Web sites for newspapers, from AltaVista, by
then also owned by CMGI.
Engage, Mr. Wetherell's pet project in targeted advertising, was also in
trouble. The few advertisers who tried the system found only modest
benefits. Mr. Wetherell bought eight Internet advertising companies and
merged them into Engage, broadening its scope and giving it a new lease on
life — for a while.
Icast was another company that transformed itself several times. In February
1999, Mr. Wetherell hired Mr. Braun, formerly of NBC, to spend $100
million to develop a company that would use sound and video over the
Internet. (Yahoo had just bought Broadcast.com, a similar company.)
There was little agreement, however, about what Icast should actually do.
Mr. Braun wanted to focus on live events and celebrity Web sites. He bought
Signatures, which sells celebrity-endorsed merchandise, from Sony. But Mr.
Wetherell saw Icast as the multimedia equivalent of Geocities, where users
could post their own sound and video. He soon merged Icast into another of
his struggling companies, zinezone, a knockoff of About.com, which
features hobby and other topical sites.
Nine months later, Mr. Braun was dismissed. In a federal lawsuit filed last
December, he contends that Mr. Wetherell did not honor his contract, which
he says was worth $30 million to $50 million because of the run-up in
CMGI's stock. CMGI denies the accusation.
Far and away Mr. Wetherell's biggest bet was in July 1999, when he bought
85 percent of AltaVista from Compaq Computer for CMGI shares worth
$2.3 billion. It was a curious deal: AltaVista was a big rival of Lycos, in
which CMGI still held a major stake.
But CMGI was under pressure from the Securities and Exchange
Commission to expand its operating businesses, lest it be categorized as a
mutual fund and subject to strict regulations. Moreover, relations with Lycos
were strained, and Mr. Wetherell figured that he needed a general-purpose
portal to tie together all his other companies.
The strategy turned out to be flawed. Despite its reputation as a very good
search engine, AltaVista has never established itself as a provider of a broader
range of information, former executives said. It did not attract enough traffic
to help other CMGI companies, and they did not have enough to help
AltaVista.
Still, as the Nasdaq was cresting, CMGI's stock reached a record high,
$163.50, on Jan. 3.
The Downturn
A Stock Tumble, and Cutbacks
As the Nasdaq index began sinking in April, so did CMGI stock. But even as
that slide turned into a free fall through the spring and summer, the company
continued its expansion. It started a company jointly with Compaq to provide
employee benefit information on the Web. And it agreed to spend $7.5 million
a year to put the name CMGI Field on a football stadium being built for the
New England Patriots. Former employees say that move was made largely to
drive up the stock price, because none of the company's consumer
businesses use the CMGI name.
As the year wore on, operating problems increased, especially as the market
weakened for Internet advertising.
Engage was hit especially hard, although CMGI did what it could to shore up
the problems with deals from its affiliates. In the quarter ended in July, it met
analysts' forecasts for $67 million in revenue — but only because Compaq
bought $13 million worth of advertising software and two other CMGI
affiliates spent $7 million.
By the next quarter, Engage had to face reality. It laid off 175 people in
September. In the quarter ended in October, Engage said it would post
revenue of less than $42 million, and Paul L. Schaut, its chief executive,
resigned.
The online retailers in CMGI's venture capital portfolio faced more bitter
medicine. Unable to raise more money from outside venture funds, and
unwilling to use more of its own cash, CMGI let Furniture.com,
Mothernature.com and Productopia.com simply die off.
In September, CMGI announced a restructuring, saying it would focus on
five business lines and on venture capital. It would chop the number of
companies it operated from 17 to less than 10 through mergers or sales. The
new goal would be profitability at all of its units.
That set in motion a huge shuffling of the portfolio.
My Way, based in Andover, was simply merged with Zip2's operations in
Mountain View, Calif. In reality, My Way's original advertising- supported
business closed entirely.
AltaVista abandoned its effort to be a vast consumer portal and focused on
selling its search software to corporations to use on their own sites. It laid
off 225 people. Rodney W. Schrock, its chief executive, quit in October.
Mr. Wetherell said the moves were not meant to abandon either AltaVista or
My Way, but to focus more on revenue from licensing software, which is
more dependable than that from advertising.
"We are concentrating on what works in both today's and tomorrow's
Internet," Mr. Wetherell wrote. "Advertising will continue to be a major force
for the Web, but it will be slower to develop than other revenue sources.
When it does take off more strongly, we are well positioned to benefit."
Curiously, even through the fall, Icast, which depended largely on
advertising, continued to hire senior executives and proceeded with its
expansive plan to build an entertainment site. But in mid-October, CMGI
suddenly decided to stop financing Icast and gave its management a few
weeks to find a buyer. After fruitless discussions with prospects like the
News Corporation, Icast closed. "It was very abrupt," one former Icast
executive said. "It wasn't thought out. They were in panic mode."
The bad news was not over. Last month, the company warned analysts that
revenue in the quarter ended in October would actually decline, a mark of
dishonor for a growth-driven Internet company. It promised to reduce its
burn rate from $225 million a quarter last July to $45 million next July. (It
will announce its complete results this Thursday.)
Cutbacks, meanwhile, continued. CMGI closed 1stUp, its advertising-
supported Internet service offered free to consumers, and it hired investment
bankers to sell Raging Bull, a series of chat boards about stocks, which has
been a personal favorite of Mr. Wetherell.
One director said the board's main priority was to encourage Mr. Wetherell to
make sure he had enough cash on hand to stay solvent. Mr. Wetherell did not
raise as much money when the stock was at its peak as the board had hoped,
this person said, though CMGI's $1.1 billion in cash and marketable securities
does provide a buffer.
The mood in Andover is grim. "It's a changed and beaten company," said one
executive who left this year. "It has none of the bravado and
world-domination schemes that had been there a year earlier."
One current top executive said CMGI's low stock price was prompting
employees to abandon worthless options and seek their fortunes elsewhere.
Mr. Wetherell, moreover, wrote that he began looking for a chief operating
officer last month because "we are getting to critical mass in size."
But even analysts are asking what that critical mass has become now that the
quick I.P.O. profits are gone. CMGI says it will be a confederation of
operating companies, perhaps a new-economy General Electric. But CMGI is
missing at least one key piece of the G.E. formula: None of CMGI's
businesses are No. 1 in their categories, and few are even No. 2.
"The market had evaluated Wetherell on his ability to identify great new
concepts," said Lowell Singer, an analyst at Robertson Stephens. "Now the
rules have changed. He is being graded on his ability to run them as
businesses."
Copyright 2000 The New York Times Company |
