OTOT Non-GG Investment Query From Relative Newbie :0)
As some of you may recall, I recently got in on the ground floor during the IPO of a friend's IP telephony company, ITXC. It's done quite nicely since then, and I believe it has good future prospects given its management, potential market, and so forth. (NB: It is definitely a Shiny Pebble by thread standards, and I am not recommending it to GGers.) My query is the following: based on the story below, it seems like anyone who believes strongly in ITXC's future prospects (as I do) should run, not walk, to the store and load up on VocalTec shares. Is my reasoning correct? thanks,
tekboy/Ares@enthusiasticnewbie.com
thestreet.com. VocalTec's Lone Voice on the Street May Be Its Investment in ITXC
By Kevin Petrie
Staff Reporter
11/11/99 12:24 PM ET
SAN FRANCISCO -- After inventing the Internet
telephone and watching giants steal the business,
VocalTec (VOCL:Nasdaq) might wring a little salvation
from Wall Street -- thanks to one investment it made
along the way.
VocalTec owns a 16% stake in the Internet telephone
carrier and customer ITXC (ITXC:Nasdaq), according to
a trader and equity analyst. ITXC has tripled in six
weeks to 39 from its offering price, placing VocalTec's
stake at roughly $217 million -- more than VocalTec's
entire market capitalization of $152 million.
Put another way, ITXC is worth $19 per VocalTec share,
while VocalTec, of Herzliya, Israel, currently trades at 13
1/4.
"We watch it and just shake our heads," says CEO Tom
Evslin of ITXC and a former board member of VocalTec.
Evslin wouldn't speculate on when the gap might close,
but says it's another case of investors focusing keenly
on a company's operations and discounting its holdings.
In the third quarter, ITXC's revenue rose 20-fold to $6.5
million from the year-ago quarter. VocalTec's rose 4% to
$6.8 million in the same period. Small wonder that some
see ITXC as a prime candidate for a takeout. Small
wonder also that ITXC's shares are such a windfall for
VocalTec's balance sheet.
"It seems that investors are willing to recognize these
types of assets," says Phil Leigh, an analyst at
Raymond James. For this reason, Leigh has a buy
rating on CMGI (CMGI:Nasdaq), which tends a portfolio
of lucrative Internet investments. Leigh rated VocalTec a
hold before changing coverage last spring, when ITXC
was still private. His St. Petersburg, Fla.-based firm has
no banking ties to CMGI, ITXC or VocalTec.
In 1995, VocalTec released the first software that
allowed people to converse through PC microphones
without paying long-distance calling charges. But
VocalTec has lost to the marketing muscle of Cisco
(CSCO:NYSE), Lucent (LU:NYSE) and Nortel
(NT:NYSE). Carriers will invest $700 million in Internet
telephone networks in 1999, nearly four times last year's
levels, according to the consulting firm Frost &
Sullivan.
And VocalTec will claim less than $30 million from that
pile. Its shares, after streaking to 30 in October 1997
from 6 in May 1997, have since slumped. After years in
the red, profits still aren't happening. The company
posted a loss of 49 cents a share in the third quarter,
compared to a 34-cents-a-share loss in the same
quarter last year. On Monday, Elon Ganor, the
company's chairman, said he's reassuming his seat as
CEO and replacing the short-lived CEO Doron Zinger.
The two companies rate quite differently in Wall Street's
estimation. While VocalTec has developed promising
new uses of its software, many still view it as a Nasdaq
old-timer that has disappointed. VocalTec is valued at
$152 million or 6 times revenue for the trailing four
quarters, while ITXC trades at $1.4 billion or 93 times
revenue.
Against this backdrop, investors are ignoring Ganor's
success as a venture capitalist. VocalTec can't sell ITXC
until next spring, and would pay taxes on the gains.
Even in today's high-rolling market, investors find it risky
to play one volatile Internet stock as a proxy for another.
So the gap is waiting to close. One trader asks, "What's
going to bring it together?"
For some other communications-equipment companies,
the answer has been acquisition. The trader profited on
the wireless-systems company Telxon (TLXN:Nasdaq),
part owner of the start-up Aironet Wireless
(AIRO:Nasdaq). Telxon spiked 15% Tuesday when
Cisco said it would acquire Aironet for $800 million in
stock.
Shares of Advanced Fibre (AFCI:Nasdaq) enjoyed a
similar boost from its stake in Cerent, which just this
month folded into Cisco for stock worth a staggering $7
billion. It's not just equipment companies that are
consolidating. The forces to merge also are pressuring
carriers such as ITXC. Evslin won't speculate on a
buyout, but hints that it's not out of the question. "In the
end, the biggest network wins," he says. "You can't say
internal growth is necessarily going to be enough."
"ITXC holds a lot of value for a suitor," says Pete Dailey,
managing partner with Frost & Sullivan, which has
consulted for VocalTec but not ITXC. The local-phone
company SBC (SBC:NYSE) in particular might benefit
by absorbing ITXC's long-distance networks in the U.S.
and Europe, he says. An SBC official declines to
comment on the possibility.
If ITXC were snapped up, VocalTec would finally reap the
desserts of an investment that started with seed money
in 1997. ITXC responded by building VocalTec servers
and software into its network, although it has since
deployed Lucent and Cisco equipment as well. In July,
ITXC's Evslin grew busy with his own upcoming IPO and
resigned as director of VocalTec. VocalTec's Ganor,
who wasn't available for comment, remains on ITXC's
board. (Flatiron Partners holds stakes in both ITXC and
TheStreet.com Inc. (TSCM:Nasdaq), publisher of this
Web site.)
VocalTec and ITXC still cooperate -- for example,
winning business with China Telecom in the spring.
But for now, it seems the best way for VocalTec to
benefit from ITXC is to simply hold onto its shares.
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