To all, forgive me if someone has already posted this. It's kinda depressing.
From TSC
COMMENTARY >> SILICONSTREET.COM Why the Street Disses Safeguard Scientifics
By Adam Lashinsky
Silicon Valley Columnist
9/29/99 7:00 AM ET
Poor Safeguard Scientifics (SFE:NYSE). If its progeny, Internet Capital Group (ICGE:Nasdaq), is the next CMGI (CMGI:Nasdaq), then Safeguard was the first CMGI.
Safeguard, based in Wayne, Pa., sort of invented the publicly traded venture-capital-firm-pretending-to-be-a-holding-company model. Among its more successful early investments: Novell (NOVL:Nasdaq), Cambridge Technology Partners (CATP:Nasdaq) and Sanchez Computer Associates (SCAI:Nasdaq).
So why poor Safeguard? Its stock has more than doubled since February to Tuesday's close at 71 1/2, and it's basking in the glow of ICG's having become a one-company stock-market event. But unfortunately for Safeguard, it's also being treated like the Old Man of the Internet financing industry. The most tangible example of this shabby treatment is its valuation. At a recent $2.4 billion, Safeguard actually is trading at a discount to the apparent value of its pieces, including a 14% stake in ICG that's worth about $1.7 billion.
J.P. Morgan Securities analyst Sterling Auty guesses that Safeguard's private-market investments are worth about $390 million and that the investments in public companies would fetch about $2.3 billion on the open market. In comparison, ICG's estimated total assets are worth perhaps $1 billion. Its market capitalization: more than $11 billion.
For the nonmath majors out there, that puts Safeguard's value at about a 9% discount to what Auty calls its "fair value" and ICG at a premium of more than 11 times its guesstimated value.
But until very recently, Safeguard has flown somewhat under the radar screen. Now the company wants to change that.
"Maybe it's almost a disadvantage to have been around has long as we have," says Stephen Andriole, chief technology officer of Safeguard, which was founded in 1953 and started making information technology-oriented investments in 1985 by seeding Novell.
Andriole, who together with Palo Alto, Calif.-based colleague Craig London, swung through the Bay area this week trying to right the publicity wrongs that afflict Safeguard, probably has a point. And he's put his finger on why Wall Street isn't likely to make up the multiple disparity between ICG and Safeguard any time soon.
See, everything about Safeguard says "old," from its 40-, 50-, and 70-something-year-old executives to the ups and downs of its marquee portfolio companies, including networking software maker Novell, consultancy Cambridge Technology Partners and banking-related software supplier Sanchez. Compare that with ICG -- laser-focused on business-to-business e-commerce and teaming with executives who range in age from their late 20s to early 40s -- and one begins the understand the psychology of the seeming market discrepancy. (Indeed, long-time Safeguard board member Robert Fox is the father of ICG co-founder and managing director Kenneth Fox.)
"We're too old, and we've got a few companies that are caught in the transition from one wave to another," says Andriole. The two best examples of Safeguard companies trying to catch that next wave are Sanchez, which is reshaping itself as an applications service provider (read: Web-based software renter as opposed to per-copy peddler), and CompuCom Systems (CMPC:Nasdaq), a computer reseller, whose beaten-down stock has been that way for nearly the entire decade. By "old," by the way, Andriole was referring to the company, not the people.
Safeguard has another problem that's common for broken stocks but unusual considering its history. Wall Street isn't paying attention. Aside from J.P. Morgan (a major institution but hardly a powerhouse on technology stocks), only regional brokerages Adams Harkness & Hill and First Union Capital Markets actively follow it. This places Safeguard, unfairly, in the category of "walking-wounded" stocks nobody hears about because nobody talks about.
Andriole hints that additional brokerages will pick up coverage shortly, and that may be. But this is as good a lesson as any in the sinister ways of Wall Street. Firms that don't do a lot of investment banking business don't matter. Still, you'd think the firms that follow ICG (Merrill Lynch led its IPO in August) or even the ones underwriting the IPOs of portfolio companies like Pac-West Telecom (Bear Stearns and Banc of America Securities, plus First Union) would crunch Safeguard's numbers.
Another reason for the lack of attention is that for years Safeguard offered shares in its portfolio companies through "rights offerings" -- effectively options to purchase securities related to an IPO. Institutional investors with charters that prohibited participation in rights offerings had to stay away. Safeguard has changed that. With ICG, it offered a "directed share subscription program," which specifically allocated ICG shares to Safeguard shareholders. According to Andriole, 92% of Safeguard's shareholders exercised their right to buy into ICG. By the way, those shareholders were free to sell their ICG shares immediately, if they wished. What an easy way to get in on future deals.
At the end of the day, Safeguard remains a risky play, even at its relatively meager valuation.
"As their investments come public, Safeguard's value gaps up to a public-market valuation," says J.P. Morgan's Auty, who maintains a buy rating but doesn't set a target price. "If the IPO market dries up, you lose your catalyst" even as values are coming down because of a weak market. "It's a double whammy." |
