Merrill's at it again
New Economy 101 09/15/99 2:30 PM
By Claude P. d'Hermillon, Jr.
While Merrill Lynch (MER) watchers "ooh" and "ahh" over the company's last-minute stake in leading electronic communications network Archipelago, not to mention its belated move into online trading, the financial services giant is concocting a novel new way to buy Internet stocks - not some new approach to Internet brokerage, but a new type of fund, actually a trust that holds nothing but Internet plays. And not just any plays. Merrill's Internet Holders trust plans to fill its portfolio with the Internet's 20 largest companies, based on their valuations as of August 31.
Unlike standard mutual funds or other types of trusts, Internet Holders will trade depositary receipts on the American Stock Exchange under the proposed ticker HHH. The neat thing about depositary receipts is that investors can redeem them for direct ownership in the underlying stocks, which they can do with as they please.
Say, for example, that it's crunch time, and the proceeds from the sale of a handful of America Online (AOL) or Yahoo! (YHOO) shares would more than offset your immediate need for cash, plus the requisite capital gains taxes. Instead of cashing out of a generic mutual fund in uniform sweeps, the trust will let you strategically pare away the most appropriate parts of the portfolio whenever you - not the fund manager - choose. The newfangled package also looks like it'll be an effective tax-planning tool that doubles as a fine-tuner for profit maximization. AOL at your "insane" price point? Take it off the table.
When Merrill filed its paperwork with the Securities and Exchange Commission earlier this year, the only certainty it expressed was in the size of the offering. While it had no idea what the fund would be called or when it would launch, the frothing giant gushed in its filing that it could sell as much as $1.24 billion worth of trust receipts.
In today's schizophrenic (giddy then panicked) Net stock atmosphere, the new investment vehicle could turn out to be a calming tool for investors. Although Internet stocks have bounced back in recent weeks, they took a big hit earlier this summer as the large cap leaders saw their various bottom lines fall by as much as 50% from their 52-week highs in April.
Still, the proposed roster is robust. Aside from AOL and YHOO, investors will own everything from Amazon.com (AMZN), eBay (EBAY), and ExciteAt Home (ATHM) to E-Trade Group (EGRP), Priceline.com (PCLN), and Exodus Communications (EXDS). Raging Bull stakeholder CMGI (CMGI) looks like it will have not one, but two chips on the table through its own listing, plus Chairman David Wetherell's 18% stake in Lycos (LCOS). Go2Net (GNET) is said to be in line for the number 20 spot with a portfolio weighting of less than 1%.
To make the top 20 cut, companies have to be worth at least $1 billion, have an average daily trading volume of at least 1.2 million shares, and a minimum average dollar volume of $60 million for the two months ending Aug. 31. Interestingly enough, the portfolio itself will remain fixed, which means that its holdings will only change to reflect mergers and exchange delistings.
There is, however, some concern that the trust's market cap criterion will leave investors brutally exposed to the fortunes of just a few key companies. Together, AOL and Yahoo, for example, are expected to comprise roughly 40% of the Internet Holders portfolio. Of course, that's where an investor's ability to cash in comes in to play. If a particular component takes a dive, investors can present their receipts to trust custodian Bank of New York (BK) in exchange for sellable stock.
There is one aspect of the trust that could magnify the effect its owners have on the very companies it holds. Because the minimum number of receipts an investor can buy will probably be set at 100, the fund's holders will be fairly affluent. At 100 shares per order, that works out to a minimum investment of about $10,000. Though far from institutional in magnitude, the actual average shareholder's stake will almost certainly be greater. And it's a pretty safe bet that institutions themselves will want to participate. Together, trust holders may be capable of generating a thread of trading activity that Wall Street has never seen.
Indeed, without the average investor to temper the behavior of the relatively few, today's high-flying Internet stars could find themselves and their exorbitant valuations moving based on the behavior of Merrill's trust.
There are plenty of other ways for investors to collectively tap into the Net's crŠme de la crŠme. Indeed, the number of Internet funds has doubled since last August. That list includes the Amerindo Technology Fund (ATCHX), Monument Internet Fund (MFITX), Internet Fund (WWWFX), Munder NetNet (MNNAX), Unified Select Internet (no ticker), Analysts internet.fund (no ticker), ING Internet (INGAX), Enterprise Internet (EIFAX), and WWW Internet (WWIFX). The first known closed-end Internet fund is due from LCM Capital Management, Inc.
Heck, dot-com hungry investors can also buy shares in companies like CMGI, which seeds its capital among dozens of Web companies. And sooner than later, they'll probably be buying Internet index funds based, for example, on TheStreet.com's (TSCM) Internet Sector index, Dow Jones' (DJ) Internet index, Internet.com's (INTM) ISDEX, and Ziff-Davis (ZD) property Interactive Week's Internet index.
Back at Merrill Lynch, meanwhile, folks aren't saying much about the fund or when it will launch, because they're in the SEC-mandated quiet period. Regardless, it should be interesting to see just how many lives Merrill has when it comes to the Internet. It'll also be fun to see when, if ever, Merrill Lynch Vice Chairman John L. Steffens, the guy who canned the Net just last year, suddenly pipes up with some sage words of insight on the dynamics of online finance.
Any advice for the Chairman? |
