This is from Briefing.
CMGI: Part Venture Cap, Part Mutual Fund, All Internet
Lets face it. Even though investors in Internet companies like Yahoo and Amazon have become rich in the last two years, the real investment winners in the Internet revolution have been
the venture capital firms that funded them. Many of these firms made ten times their money on the day their Internet company went public, to say nothing of the returns after that.
And unfortunately, you, the private individual, simply doesn't have the chance to invest at the venture capital level. The venture capital firms are not public, nor do they solicit funds from
private individuals.
Just about the closest you can get to investing in a venture capital organization is buying stock in CMG, Incorporated (CMGI). This company, virtually unlike any other Briefing has seen
in the Internet arena, is part Internet venture capital firm, part Internet mutual fund, part marketing firm.
CMGI History
To understand CMGI, you should first understand its history.
Originally formed as a direct mail marketing service, geared towards the college student market, College Marketing Group, Incorporated was a profitable, but average company. In
1986, CEO David Wetherell, purchased the entire company in a leveraged buyout. Eight years later, after improving the growth rate and profitability of the company, he brought the
company public, still as a direct marketing company.
But then, CMGI discovered the Internet, when Mosaic was the only browser around.
For a marketing company, the sudden appearance of a completely new playing arena, a huge new arena, is almost a dream come true. And CMGI jumped in on it immediately.
In February 1994, a full two months before Netscape (NSCP) was formed, CMGI founded a wholly owned company called Booklink Technologies, with a total investment of less than
$1 million. The product was a Web browser (remember when there were more than two?)
Netscape released Netscape 1.0 in August of 1994 and the Internet revolution was born. Microsoft, the sleeping giant, was awoken. America Online (AOL), suddenly realized that they
had to do something fast to become an Internet player.
By December of 1994, without ever generating any revenues, Booklink Technologies was sold to AOL for $30 million in stock. But by the time CMGI got around to selling the stock, it
had become worth nearly $72 million.
CMGI's "less than $1 million" investment had become worth at least 70 times that in about one year. And CMGI the Internet venture firm was born.
CMGI took the AOL money and began a series of investments. The list of companies they invested in at that time reads like a virtual who's who of the Internet, with Lycos, GeoCities,
and NetCarta all being initially funded by CMGI.
In 1995, Lycos was started by CMGI with a $2 million investment for an 80% stake. That stake, now diluted by Lycos' IPO in 1996, to under 25% is still worth over $420 million, even
after selling more than $125 million over the past year.
In 1996, CMGI invested $2 million for a 54% controlling interest in GeoCities. That stake, now diluted to 29% is worth more than $260 million.
And NetCarta was sold just one year after its creation to Microsoft for $20 million, and Microsoft purchased 4.9% of the company for $6.8 million.
See what we mean? Even though Yahoo and Amazon investors have had incredible returns in the public market, they aren't anything like the skyrocket returns CMGI has gotten by
funding Internet companies prior to coming to market. Six times your money in one year, the return to date on CMGI stock, is pretty good, but next to returns of 70 times or 100 times
in one year, and 250 times in two years, it just doesn't compare.
CMGI Today
Today, CMGI is divided into three separate divisions. @Ventures buys stakes in existing companies and funds start-ups. The CMG Internet Group starts wholly owned subsidiary
companies, from scratch, with management coming from CMGI. The Direct Marketing Group, which is essentially the original company, still sells direct mail lists and marketing data.
But the Direct Marketing Group, at this point, is an inconsequential piece of the company. It loses money, but the losses are dwarfed by the investment returns from the other groups.
The only way to really view CMGI today is as an investment in a venture capital fund, for the potential returns from still private companies, or as an internet mutual fund, for the potential
returns from its holdings in other public companies. In truth, CMGI is a unique blend of both.
CMGI Holdings
CMGI owns substantial portions on more than 27 different companies. Here, by division, is a listing of companies that CMGI is invested in.
CMGI Division
Role
Companies
@Ventures
Venture investments, partial or
minority positions
blaxxun interactive, Critical Path, Chemdex Corp.,GeoCities, Koz , Lycos, Mother
Nature.com, Parable, PlanetAll, Reel.com, Silknet, Softway Systems, Speech
Machines, TicketsLive Corp., Vicinity,Visto
CMG Internet Group
Wholly owned or majority interests
ADSmart, Engage Technologies, InfoMation, Magnitude Network, NaviSite, Planet
Direct, The Password
CMG Direct
Marketing
Direct Marketing Services
CMG Direct, InSolutions, Inc. On-Demand, Solutions, Inc., SalesLink
In addition, CMGI has just announced the formation of a new $100 million investment fund for the @Ventures division.
Briefing's View
CMGI makes a spectacular story, and it will no doubt be a central part of the "History of the Internet" future books. Investors in CMGI today should not let the spectacular nature of the
story, with the incredible string of gold strike style returns blur their vision today. Just because CMGI's management showed incredible vision, execution, and luck in the past does not
guarantee terrific returns for CMGI investors today. Nevertheless, Briefing believes that the past does lend credence to the future. In addition, if you view CMGI's real business as
bringing stocks to the market for sale, it is incredibly profitable. EBay (EBAY) is often touted as the only Internet company making money, but that honor really belongs to CMGI.
In a Stock Brief later this week, Briefing will detail CMGI's ownership stakes in the public companies, and present the per-share value of each holding. In addition, we'll point out some
of the private companies likely to be brought to the market in the near future by CMGI.
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