This is from Briefing. Part 2
CMG Information Services: Peeling the Onion
Normally examining a company's business is relatively straightforward. Even a large company is generally involved in a single industry, with a fairly focused direction.
CMG Information Services (CMGI) simply does not fit the usual pattern.
Although the company was initially involved in direct marketing and list management, initially for the college student market, it has since become more of a venture capital firm, having
funded more than 30 different companies over the past five years. Briefing provided a short chronicle of CMGI's history earlier this week.
Today, in order to provide a fuller picture of CMGI's business, we have compiled a list of CMGI's major investments. It is quite extensive, however, we compiled it in order to try to
somehow place a valuation on it all.
CMGI Stakes in Public Companies
CMGI holds considerable stakes in several public companies. Stakes in Hollywood Entertainment were the results of Hollywood's purchase of Reel.com. Shares of Amazon were the
result of Amazon's purchase of CMGI's 25% stake in PlanetAll. Lycos and Geocities were both initially funded by CMGI in a majority venture role.
Company
Symbol
Shares
Value (millions)
Initial Investment/Date
Amazon.com
AMZN
225,000
$28
$4.5 / 8-97
Hollywood Entertainment*
HLYW
More than 1,800,000
$29
$6.9 / 8-97
Lycos
LCOS
9,265,000
$384
$3.8 / 6-95
GeoCities
GCTY
8,800,000
$300
$5.8 / 1-96
Open Market
OMKT
N/A
N/A
$5.0 / 7-98
Redbrick
REDB
N/A
N/A
N/A / 7-98
* Investment in HLYW is greater than number shown because HLYW issued 5 million shares for Reel.com, in which CMGI owned 36%, plus $30 million in cash. CMGI made an additional investment in HLYW,
amount unspecified in press release.
CMGI Stakes in Private Independent Companies
CMGI, through its venture capital subsidiaries, CMG@Ventures I, and CMG@Ventures II, owns stakes in the following private companies.
Company
Percentage
Nature of Business
CMG Entity
Blaxxun
81%
Software for 3-D online communities
CMG@Ventures I
Parable LLC
31%
Software for copy-protected Web text & graphics
CMG@Ventures I
Parable LLC
11%
"
CMG@Ventures II
Vicinity
50%
E-retail software
CMG@Ventures I
Chemdex
16%
Online sale of medical products
CMG@Ventures II
Critical Path
7%
Email products for ISPs
CMG@Ventures II
KOZ
14%
Software for web communities
CMG@Ventures II
Mother Nature's General Store
24%
Online vitamins, herbs
CMG@Ventures II
Silknet
24%
Web based software for customer service apps
CMG@Ventures II
Softway Systems
9%
UNIX/NT portability
CMG@Ventures II
Speech Machines
29%
Speech recognition over the Web
CMG@Ventures II
TicketsLive
14%
Online ticket sales
CMG@Ventures II
Universal Learning Technology
12%
Software for Web-based education environments
CMG@Ventures II
Visto
6%
Personalized Web content
CMG@Ventures II
Unlike CMGI's investment in public companies, it is very difficult to place a value on these private companies. We wish we could somehow value each company separately from their
pro-formas, but they as private companies, they aren't available.
CMGI Stakes with Controlling Interest in Private Companies
CMGI, through its Internet Group subsidiary, owns controlling stakes in the following companies. Most are created and funded at the same time by CMGI. Portions not owned by
CMGI are generally owned by cofounders, management, and employees. This is a model very similar to that used by Thermo-Electron (TMO).
Company
Nature of Business
ADSmart
Online ad sales
Accipiter
Internet advertising management
Engage Technologies
Personal online marketing systems
InfoMation,
Web-based solution for corporate knowledge management
NaviSite
Web hosting
Planet Direct
Search engine, private labeled to ISPs
The Password
Personalized mini-Web sites
CMGI reports the consolidated operating performance of these companies, including the majority interests in Blaxuun, as a single line item component, called the Investment and
Development services division. As such, this revenue gets reported as part of CMGI revenue. For the most recent quarter, total revenue was $4.17 million, with operating losses of
$18.149 million. This is the combined revenue of eight companies. These are small companies. But as soon as they get big enough, they go out the IPO door. Since profitability does not
matter with Internet stocks, it won't with these companies, either.
CMGI Direct Marketing Business
CMGI is still engaged in its original core business of marketing, although now it is very focused on the Internet. There are four separate companies in this business.
Company
Nature of Business
CMG Direct Solutions
Direct marketing lists
InSolutions, Inc.
CDROM manufacture, fulfillment
On-Demand
Online operations logistics service
SalesLink
Literature fulfillment, telemarketing, lists
These businesses constitute the Fulfillment segment of CMGI. Total revenues in the most recent quarter were $21.8 million with operating loss of $2.5 million.
New Venture Fund Formed
Things are busy at CMGI as well, as a new venture fund, CMG@Venture III, LLC, has just been formed. This entity, which will have $100 million to invest in new companies.
Most Likely IPOs
Recently, David Andonian, President of Business Development at CMGI listed seven companies likely to go public in the twelve months. These included four majority owned companies:
Navisite, Engage Technologies, Planet Direct, and Saleslink, and three venture funded companies: Parable, Silknet, and Chemdex.
Briefing Summary
An investment in CGMI is like an investment in a mutual fund in two ways.
First, you get true diversity in a single investment. With one purchase, you get close to 30 separate Internet bets. While CMGI does have an operating business in the marketing business,
at this time, the internet investments are far more valuable than the marketing business.
Second, it is very hard to tell exactly what you are buying. You can't really learn too much about the development companies, especially the minority interest ones. In reality, you are
really buying the reputation and past performance of the management team.
Unlike, a mutual fund, however, there is way to come up with a "Net Asset Value" for all of CMGI's holdings. This is the most disturbing thing about a CMGI investment. Nevertheless,
we tried a quick, back-of-envelope style valuation.
First, CMGI's total market capitalization is now $1.4 billion.
CMGI holds stakes in public companies worth nearly $750 million. This puts a value on all of the other companies, and on CMGI's marketing business of $650 million.
Since the marketing business, and just ignoring the minimal operating revenue from the investment/development segment, does revenue of approximately $91 million (annually), with
apparently little profit or loss, (the total operating loss comes from the investment/development segments) it is very difficult to give it much of a valuation higher than $100 million. Using
this extremely rough estimate, it places a value on all of the other businesses within CMGI's portfolio of approximately $550 million.
Are the investments in the 20 other companies worth more or less than that? If more, then CMGI is an undervalued stock. If less, CMGI is overvalued.
The most difficult thing about investing in CMGI is answering that last question.
The Ultimate Internet Company
But another point of view avoids trying to value the ongoing revenue stream of CMGI's component companies. CMGI can be thought of as a company whose product is Internet stock.
For the last two years, this has been a great business. The gross margin is fantastic and demand is high. And as long as people keep buying Internet stocks, whether the underlying
business is profitable or not, CMGI's business should continue to be very profitable. When that business hits a brick wall, however, CMGI stock will likely collapse along with it. But, for
now, at least, that day seems pretty far off. Until then, CMGI is likely to be one of the prime beneficiaries of Internet fever.
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