July 7, 1999
Alta Vista May Be a Key Part in CMGI's Puzzle
By Carolyn Whelan
CMGI 's $2.3-billion purchase of Alta Vista, announced last week, caused
a stir on Wall Street -- but mostly for the impact it would have on the seller.
Digital Equipment's flagship search engine, considered among the best of the
breed by technogeeks, had been gathering dust on Compaq Computer's
shelves since the troubled PC maker got Alta Vista in last year's acquisition of
Digital. Analysts seemed to like the deal, because they said selling Alta Vista
will lighten Compaq's load and free it to focus on its core business.
Somewhat less appreciated was the likely impact the sale
will have on the buyer -- CMGI, an Andover, MA holding
company for many hot Internet properties. Until now,
CMGI has been regarded as a combination Internet mutual
fund and venture capital firm, run by a clever asset manager, David Wetherell.
But now some analysts see Alta Vista as a bridge that can link many of
CMGI's key e-commerce and online advertising properties, creating a new
Internet powerhouse. As the 15th most visited site in May, according to
Media Metrix, Alta Vista should bring a lot more traffic into CMGI's emerging
electronic mall.
Paul Merenbloom, an analyst at Prudential Securities who rates the stock a
Strong Buy, says it's all part of a grand plan.
"They started out as a general store in the Wild West, then became a strip
mall. Now they're the Mall of America -- all built around communities," he
explains.
"The Alta Vista acquisition allows them to stream together their investments as
a network," adds Dan King, an analyst with LaSalle St. Securities.
It's not the first time CMGI tried to buy a major search engine or portal. A
few months ago, according to published reports, Wetherell approached
Robert J. Davis, CEO of Lycos (of which CMGI owns 18.5%), but Davis
apparently balked. Earlier, Wetherell had blocked a proposed merger
between Lycos and Barry Diller's USANetworks, because he thought the
selling price was too low.
That, a widespread sell-off in the Internet sector, a lull in the market for initial
public offerings and a larger-than-expected third quarter loss brought CMGI's
stock price down to 75 7/16, almost exactly half its closing high of 151 in
April. The shares have rallied since then, but at Wednesday's closing price of
118 the stock is still 28% off its high.
As a holding company for Internet properties, CMGI has been seen as "a
good way to play Internet startups," as King puts it. Today, CMGI's portfolio
consists of eight wholly owned and 23 minority owned companies that focus
on Web hosting, profiling, advertising and building and feeding content into
networks.
Such as? Silknet Software, which makes customer interaction software, and
Critical Path, for e-mail hosting -- both of which are partially owned by CMGI
and recently went public. Privately held companies in the CMGI portfolio
include Web audience profiling companies Engage and the Internet Profile
Corporation, which will soon merge; Activerse, which provides instant Internet
messaging; iCast, a new broadcast venture; Raging Bull, a stock chat site, and
TicketsLive Corp., which connects buyers directly to ticket offices.
Planning two to four new investments and one acquisition a month, CMGI is
becoming a magnet for new ideas -- and people looking to invest in the
Internet. "They can easily attract other investors to set up additional funds,"
King says. Indeed, capital flows in from respected patrons like Microsoft,
Intel and Vulcan Ventures. The pros expect as many as 20 of CMGI's
properties to go public over the next year.
Finally, CMGI owns big stakes in Lycos and GeoCities (which was bought by
Yahoo), representing 2% of Yahoo's stock. And now, with the addition of
Alta Vista, some analysts speculate that CMGI will sell off its stake in Lycos,
which is currently worth around $865 million.
How much is the whole company worth? Who really knows? But in a recent
report, bullish analyst Merenbloom did a sum-of-the-parts valuation, based on
the individual holdings' internal rate of return. (He says valuations based on
price/earnings aren't useful, since most of CMGI's holdings are early-stage
ventures that won't make money for years.)
First of all, he expects CMGI's holdings
in public companies to increase in value
from around $2 billion now to about
$3.5 billion by next year and to over $5
billion by 2001. He values CMGI's
stakes in private companies at roughly
$7.5 billion now, but thinks their
valuations could exceed $20 billion in
2001 as holdings are sold or go public.
That sounds pretty optimistic, and
Merenbloom is assuming some mighty
healthy growth rates for these
companies. Still, his target price of 180-210 for CMGI stock doesn't seem
outlandish.
But though CMGI has an excellent track record, even its most promising
holdings have no history -- or earnings. And CMGI is particularly vulnerable
to market sentiment about the Internet. "If the Internet is hot, then CMGI
stock flies," says Merenbloom. And ,of course, in any prolonged downturn,
"the IPO window shuts, which means they can't harvest their earnings," says
Christopher Lord, portfolio manager of the Pivotal Asset Management Fund.
Still, many Wall Streeters are confident that CMGI has the best portfolio of
early-stage properties around and if anyone can survive a correction, it's
Wetherell.
"We're betting on the team," says Lord, who recently increased his holdings in
CMGI stock. "They've been early, right, and have terrific instincts and
investment acumen."
CMGI's fans expect Alta Vista to be another winning bet as well.
from Barron's
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