Is Internet Capital Group Really Worth $20 Billion?
By Bill Mann
December 3, 1999
I'm going to tell you a story of a dream. It's pretty simple. A small
arm of Safeguard Scientifics (NYSE:SFE - news) is spun off into its own
company in August 1999. This company is comprised of 35 employees, the
operating unit, and partial ownership in (at the time) 31 Internet-based
business-to-business companies. At the initial public offering (IPO)
price of $12 per share the company was worth $1.3 billion dollars. Now,
four months later, the company, Internet Capital Group (Nasdaq:ICGE -
news) is valued by the market at more than $21 billion. I am certain
that the insiders and shareholders are still trying to shake off the
altitude sickness.
ICG is worth a staggering $617 million dollars per employee. This makes
even eBay (Nasdaq:EBAY - news) , the poster child for richly valued
Internet companies, look positively dowdy by comparison at a market cap
of $167 million per employee. Makes me wonder what the people at, for
example, Amazon.com ($15 million per employee) and General Electric
($1.5 million per employee) are doing wrong.
So what about this ICG? What makes it so valuable that people are
willing to bid it up to absolutely unheard of levels? A brief review of
its financial statements doesn't give any indication that this company
is all that special, but there again a blind look at any Internet
company's financials would likely make investors run away in horror.
From the ICG press release on its 3Q99 results:
Internet Capital Group reported a loss for the quarter ended September
30, 1999 of $15,274,369 compared to a loss of $4,121,880 a year ago. For
the nine months ended September 30, 1999 the loss was $6,404,860
compared with net income of $11,890,856 in the comparable period last
year. Results for these periods include significant non-recurring gains
from the sale of securities by ICG and the issuance of common stock by
its partner company VerticalNet.
The quarterly and nine month revenues for 1999 were $7 million and $14
million, with one-time revenues during each period of $15 million and
$47 million, respectively. These "extraordinary revenues" are the key to
understanding a company such as ICG. Just like its brethren CMGI
(Nasdaq:CMGI - news) and Japan-based Softbank, the company derives much
of its value by taking promising companies under its wing, nurturing
them, using its existing stable of holdings to provide strategic
partnerships, and then spinning them off through private sale or public
offering. In 1999, ICG has held IPOs for three companies, VerticalNet
(Nasdaq:VERT - news) , US Interactive, (Nasdaq:USIT - news) and
Breakaway Solutions (Nasdaq:BWAY - news) . The cumulative market value
of ICG's stake in these companies is $1.7 billion. One could quickly see
how, based on these market holdings alone, how the aggregate of ICG's
holdings could be worth $20 billion, if only mathematically.
But wait a minute. Such disparate companies as CMGI, General Motors
(NYSE:GM - news) , Berkshire Hathaway (NYSE:BRKa - news) , and
Toronto-Dominion Bank (NYSE:TD - news) have large stakes of other public
companies, and none of them derive 100% of those holdings' value in
their market caps. Safeguard Scientifics, for example, holds $3 billion
worth of ICG but is only valued at $4 billion for its entire operation.
Why does ICG receive full value and then some for its holdings?
Depending on your perspective, one of two words comes to mind:
"Potential" and "Insanity." It is most likely a combination of the two.
ICG is in the sweet spot of the latest business rage, "B2B", or
"business-to-business" transactions using the Internet as a medium.
International Data Corporation estimates that the B2B market will grow
from $35 billion this year to $1.1 trillion in 2003. That is a large
market for companies to address. But what about ICG, in particular,
makes investors believe that it is so well positioned that it can be
valued at 328 times current revenues?
B2B is not a new concept. Dell (Nasdaq:DELL - news) , Gateway (NYSE:GTW
- news) , and certain CMGi properties, to name a few, have already been
providing market-making efficiencies to their respective markets for a
number of years. ICG seems to have caught the public's fancy just at a
time when B2B got its buzz -- in the summer of this year.
But public fancy is no way to Foolishly evaluate a company and its
prospects. The company must, in the end, show the ability, or the
potential even, to turn a profit. In the end, this is where ICG falls
dangerously short of the unreasonable expectations placed upon it by
shareholders. It is a company focused upon a market that does not yet
exist, comprised of three dozen units that are trying to compete with
the hundreds, or even thousands of other startups or existing companies
focusing on the same potential market.
B2B will likely end up as an absolutely huge commercial market, as
companies use the Internet to streamline their transactions with vendors
and customers. But huge how? Are these market makers really going to
save companies so much money that they will net $1.1 trillion in
revenues by 2003? That is nearly the gross domestic product (GDP) of
France, a staggeringly large number. No, more likely is that the market
makers would receive a very small portion of this market amount. The
majority of the market would manifest itself as cost-savings for the
companies actually doing the transaction. So much as eBay cannot count
the value of the goods that pass through its system as "revenues"
neither can B2B companies count on this amount of income.
ICG may end up being a prominent player in this market, but it is
competing not only against existing deep pockets in CMGi and Softbank,
but also against those entities that will come afterward. In hindsight,
ICG left billions of dollars on the table by having its IPO at such a
low price level, and as such does not have the internal financial
resources that would otherwise be available. The company will have to
look to additional equity sales to raise additional funds, either
through private placement or a secondary offering.
All of these factors add up to point to a massive overvaluation of ICG.
The company may, in the end, prove that it deserved its market cap, but
right now it is valued very richly on a series of unproven concepts
manifested in small unprofitable companies run by unproven management
teams in a speculative market. It is a company that, even at a quarter
its value, would be the highest of high-risk investments. As it stands,
it's just nuts. |
