Intel Investors - A review of Intel's Internet Investment business
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redherring.com
Intel's got Internet inside
By R. Scott Raynovich
Redherring.com
August 11, 1999
You're likely to hear a company such as CMGI (Nasdaq: CMGI) mentioned before Intel (Nasdaq: INTC) in a discussion about Net-savvy institutional investors. But the chip giant was one of the earliest participants in the Internet boom, and these early strategic investments are now starting to pay dividends.
The Santa Clara, California-based company, whose investment portfolio in more than 250 companies is estimated to be worth over $3 billion, has allocated over half of its investment funding to Internet-focused startups, according to company officials. The company started making sizable Internet investments as early as 1996, and those moves now appear considerably prescient as Intel emerges as a major shareholder in many of the leading Internet IPOs.
For example, in just the past few weeks, Intel emerged as a major shareholder in two of the most closely watched Internet IPOs: the company holds a 14.3 percent stake in Liquid Audio (Nasdaq: LQID), which boomed 143.7 percent in its IPO on July 9, and the chip company now holds a 9.6 percent stake in Quokka Sports (Nasdaq: QKKA), which debuted July 28. But these are just two of the more recent Intel Internet success stories. The company's track record of Internet investments reads like a who's-who of the Internet: @Home Network (Nasdaq: ATHM), Broadcast.com, CMGI, CNet (Nasdaq: CNET), eToys (Nasdaq: ETYS), iVillage (Nasdaq: IVIL), and Ticketmaster Online-CitySearch (Nasdaq: TMCS) are just a few of the companies that received early funding from Intel.
INTEL'S IPO BLOCKBUSTERS
Company
Intel's post-IPO stake
Market value as of 8/3 close
*Broadcast.com
5.2%
$112.1 million
eToys
7.56%
$291.82 million
Liquid Audio
14.3%
$67.21 million
Quokka Sports
9.6%
$35 million
*This amount includes the proceeds of a sale of 167,500 shares of Broadcast.com in February and takes into account the conversion of Broadcast.com shares into Yahoo following Yahoo's acquisition of the company last month.
BUILDING BLOCKS
Intel's Net investment strategy has two primary goals, according to Intel officials. The first goal is strategic: Intel believes that seeding the market for high-powered Internet content will drive demand for Web servers, which in turn will fuel Intel chip sales. It may also be noted that processor-intensive content does little to harm sales of Intel's high-end consumer chips.
"Every investment we make has strategic components," says Bill Miller, who as director of content and commerce business development at Intel supervises the Internet investment strategy. "It needs to seed a processor market. For example, we were interested in eToys because we thought it was a way to make the chip business take off."
Following eToys's IPO in late May, Intel owned 7.56 percent of the company, which last week had a market cap of roughly $4 billion.
Indeed, Intel chairman Andy Grove believes that the growth of Internet content and e-commerce is fundamental to Intel's future. As most components of the U.S. economy are transferred to the Internet, businesses that never before required technology will be considering Intel's products, says Mr. Grove. He has positioned Intel as the supplier of the "building blocks of the Internet." By funding the companies that will buy these building blocks, Intel seeds its future markets. Because Intel believes that much of the future growth in chip sales is shifting to servers, rather than consumer-oriented PCs, the development of Internet content and e-commerce is crucial to the company's growth.
Mr. Grove spoke of such principles in May at the L.A. Times Investment Strategies Conference, sponsored by the Los Angeles Times. In his speech, Mr. Grove stated that the Internet's fundamental influence on the growth of the U.S. economy could be demonstrated by its effect within his own company.
"The percentage of our business that we conducted on the Internet in 1997 was around zero," said Mr. Grove. "In 1998, over 20 percent of our business was conducted on the Internet. In the current year, our estimate is that 42 percent of our business is going to be conducted on the Internet."
Mr. Grove believes that this Internet effect will extend over all U.S. -- and eventually international -- businesses. Every business will become an Internet business, and thus every business will become a potential Intel customer.
INTEL THE VC
Intel's Internet investment strategy has had more than strategic benefits, however. In addition to seeding growth of the Internet, the company has enjoyed some phenomenal returns on investment -- both on paper and in terms of realized profit.
Intel's principal strategy has been to participate in early rounds of financing of private companies, with bets ranging from $1 million to $10 million. Most investments have been in the $3 million to $5 million range, according to Intel spokesperson Rob Manetta.
Of the 250 companies in which Intel has taken a stake, "most are Internet companies," says Mr. Manetta. The company declined to disclose a full list of its individual investments, or the specific amounts of its private equity investments, but many of these investments became public information when those companies filed for their IPOs.
A fair measure of the company's success can be gleaned from a few of its IPO blockbusters. For example, Intel's investment in Broadcast.com was a huge winner. Following the Broadcast.com IPO in 1998, Intel owned 5.2 percent -- or 884,000 shares of the company. The company was later sold to Yahoo (Nasdaq: YHOO) for approximately $5 billion in stock, but before that, Intel had already started taking profit from its initial Broadcast.com investment.
For example, on February 3, 1999, Intel registered to sell 25,000 shares of Broadcast.com at a value of $3,503,125, shortly after Broadcast.com had split 2-for-1, turning Intel's holdings into nearly 1.6 million shares. On February 5, 1999, the company sold 142,500 shares valued at $24 million. Even after this $27.5 million windfall, Intel still held well over a million shares of Broadcast.com, which have since been converted to shares of Yahoo following Yahoo's purchase of Broadcast.com earlier this month. In that transaction, Yahoo exchanged approximately 3 shares of Yahoo stock for every 3.7 shares of Broadcast.com stock.
Another example is iVillage. Intel's initial investment of roughly $1 million in iVillage in June 1998 is now worth well over $40 million at iVillage's recent market price.
In addition to the obvious financial advantage of owning stakes in some of the leading Internet IPOs of the past year, Intel has also had an insider's look at the workings of many of these Internet companies.
"One of the side benefits of our investments is how much we learn about the emerging business models," says Mr. Miller. "You get a front-row seat at some of these companies."
"SMART AND SEASONED"
For the companies that received early-stage funding from Intel, the prestige and experience of Intel's involvement was in some cases even more important than the funding.
Charles Conn, CEO of Ticketmaster Online-CitySearch, says he viewed Intel's investment as "smart and seasoned" money that was important to the development of the company. Intel was an early-round investor in the privately held CitySearch before it merged with Ticketmaster Online late last year.
After its investment in CitySearch, Intel earned the right to appoint a 20-year Intel veteran named Jim Johnson to CitySearch's board. Mr. Johnson helped the company with his good understanding of the small and medium-size business markets, says Mr. Conn.
"They weren't hyperactive like venture capitalists -- it was patient and thoughtful money," says Mr. Conn. "They put actual business people on the due diligence -- it wasn't just finance guys, but people that had a sense for building a business."
CitySearch eventually merged with Ticketmaster Online to become the publicly traded company Ticketmaster Online-CitySearch, which is controlled by Barry Diller's USA Networks (Nasdaq: USAI). Although Intel's initial investment was small enough that it wasn't required to be reported on TMCS's S-1 document, it's safe to say the company has earned its money back -- and then some.
So do all these investment successes mean that Intel has morphed into a company that is in tune with the inner workings of the Internet?
"I hope so," says Mr. Miller. "It should make us more nimble. It should make us a supplier of building blocks to the Internet. If we hadn't been making so many Internet investments, we wouldn't have been learning so much about the business." |
