Posting heard on the street column this morning as I feel Ron did a good job but it shows how fund managers try to take advantage of the show. imo You all decide for yourselves... John
February 11, 1999
Heard on the Street
An Internet Stock Jumps,
But One Investor Buys Low
By ROBERT MCGOUGH
Staff Reporter of THE WALL STREET JOURNAL
Warren Buffett and Alan Greenspan have thrown up their hands at putting
a value on Internet stocks. So it's not surprising that investors in OnHealth
Network are scratching their heads: Is stock in the money-losing Internet
company worth $50, $14 -- or $5.50?
That has been a burning question since
mutual-fund manager Garrett Van Wagoner
appeared on CNBC-TV on Jan. 13, saying
OnHealth, a Seattle-based Internet provider of
health information, was worth $50 a share "right
now."
Whoa. OnHealth stock began trading that day at 8
1/4; it surged to as high as 21 7/8 before closing at
18 1/2. Wednesday, it closed at 11 3/4 in Nasdaq
Stock Market trading. When prodded by the
CNBC anchorman, Mr. Van Wagoner disclosed
that his money-management firm owned more than
10% of the company's shares outstanding.
Here is what investors didn't know: Mr. Van Wagoner's funds would soon
own even more of the stock -- and for far less than the market price. On
Feb. 1, when OnHealth stock closed at 14 11/16, Mr. Van Wagoner's
funds were big buyers in a $14.3 million private placement of the stock for
only $5.50 a share.
Now, there's nothing inherently wrong with that. Money managers have
wide freedom to talk up stocks, even when they could clearly benefit from
the result. As Mr. Van Wagoner says, "I know of no prohibition against
my telling people what I like in any shape or form." And OnHealth says it
set the price for the $14.3 million private placement based on a discount to
the stock's trailing-average price.
But bears, who think the stock of
OnHealth is overpriced, raise a
question: If OnHealth is such a great
company, why was it willing to sell
nearly 2.6 million shares -- equal to
20% of the 12.8 million shares
already outstanding on Dec. 16 --
for $5.50, or only 37% of the
market price? The bears suspect the
company needed the money to
avoid an impending cash-flow
problem. Bulls, such as Mr. Van
Wagoner, argue that OnHealth's
business is only now accelerating.
In a filing made public Wednesday, Van Wagoner Capital Management,
the manager of the mutual funds, disclosed that it owned 1.926 million
shares of OnHealth, or a hefty 16.21% of the company. That's an increase
of about 700,000 shares from what Mr. Van Wagoner indicated owning
on his TV appearance. Mr. Van Wagoner said he hasn't sold any shares
since recommending the stock on TV. The private-placement shares must
be held for at least 90 days.
OnHealth Network has reinvented itself in the past year and a half. The
company was born in 1990 as IVI Publishing, a maker of CD-ROMs
containing technical medical information. But after steep losses, a new
chairman tossed out the old management in late 1997, hired Robert
Goodman, the former head of business development at MSNBC
Interactive News, and the company became OnHealth Network.
Mr. Goodman revamped the staff, moved the company to Seattle from
Minneapolis and relaunched the company's Web site (onhealth.com). The
site contains both technical information, from its days as a CD-ROM firm,
and more readable, consumer-oriented articles on health, including a series
of candid articles by a copy editor on her struggle with breast cancer.
Traffic at the site has grown, which should lead to more advertising
revenue.
But OnHealth has continued to lose money -- it had a deficit of 68 cents a
share in the nine months through Sept. 30, the latest reporting period. In
that period, the company's revenue was $733,000, while its operations
consumed more than $7 million, leaving it with just $1 million in cash and
cash equivalents on Sept. 30. The company raised $5.7 million in a private
placement late last year, but Mr. Goodman, OnHealth's CEO, says that
was only "a stopgap or a bridge" until the company could raise "a
significant amount of money." From September 1998 through early
January, the stock didn't close above 6.
Enter Mr. Van Wagoner, whose star has dimmed somewhat since he was
the hottest fund manager in the land in early 1996. In the three years
through 1995, Mr. Van Wagoner had steered Govett Smaller Companies
fund to annualized returns of 51%. When Mr. Van Wagoner left Govett to
form his own company, Van Wagoner Capital Management, investors
stampeded into his new funds, and in five months he raised $1.1 billion --
the fastest start-up ever for a mutual-fund company.
Analysts said his new funds got a boost while they were still small from
"flipping" IPOs, or quickly selling hot new issues after they had run up in
price. But Mr. Van Wagoner said that IPOs played only a small role in
their performance.
Still, during 1996, the funds' returns quickly plummeted along with those of
many other aggressive stock funds. And in 1997, the four funds Mr. Van
Wagoner managed all suffered double-digit negative returns. Some
investors bailed, and assets at the complex have shrunk to about $300
million.
Mr. Van Wagoner's stock funds held about one million shares of OnHealth
Network as early as June 30, 1998. Several days before Mr. Van
Wagoner's TV appearance, the stock's price and volume perked up. On
Jan. 11, it closed at 9 1/4, when the company announced relationships
with some Internet "gateways" that could steer traffic to OnHealth. Then
came Mr. Van Wagoner's appearance on CNBC -- he advocated
OnHealth as an Internet "content provider" that would soon catch Wall
Street's eye -- and the stock soared.
A CNBC spokesman said, "We are very comfortable that Ron Insana [the
anchor interviewing Mr. Van Wagoner] did what he should have done with
regard to probing further after he [Mr. Van Wagoner] made the comments
and insuring that the audience received full disclosure" about the Van
Wagoner funds' position in the stock. (Dow Jones & Co., publisher of The
Wall Street Journal and the Interactive Journal, provides content to CNBC
in the U.S., though not the Van Wagoner appearance specifically.)
Then came the private placement. Mr. Goodman says it was "common
knowledge" that the company had been seeking a big private placement
since October. And mutual-fund manager Richard Perkins says he talked
to OnHealth about the private placement "six or eight weeks ago" -- late
last year. But Mr. Van Wagoner, whose funds are among the biggest
owners of the stock, says he didn't discuss the private placement with the
company until a week after his TV appearance.
Why did the company sell stock privately to Mr. Van Wagoner and other
investors at such a cheap price? After all, the company did a private
placement on Oct. 30 for $3.69 a share, which was actually a premium to
the stock's closing price that day of 3 1/32. Bears suspect the company
needed the infusion of cash from the private placement to avoid an
impending cash-flow problem. "Eventually we would have had to raise the
money," OnHealth's Mr. Goodman says. "Did we have to raise the money
at that time? No."
He says OnHealth needed generous terms to raise the $14.3 million he
wanted.
Kamal Hamid, an analyst at Hanifen, Imhoff who is one of few analysts
following the stock, calculates that the Feb. 1 private placement was
priced at a 30% discount to the 30-day moving average for the stock
price. Although Mr. Hamid has a "buy" on the stock, he says it was an
"expensive" deal for OnHealth.
OnHealth says it is planning to use the $14.3 million for "brand building"
and for "e-commerce initiatives," such as eventually selling items found in
drugstores through its Internet site.
The only investor quoted in the OnHealth news release announcing the
private placement? Mr. Van Wagoner.
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