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Technology Stocks : Compaq -- Ignore unavailable to you. Want to Upgrade?

To: Elwood P. Dowd who wrote (73619)	12/11/1999 12:52:00 PM
From: John Koligman	Respond to of 97611

Good morning Elwood, In addition to what Victor posted, I thought the following comments in regard to Seagate were somewhat germain since CPQ/CMGI is a somewhat similar situation... Have a good weekend, John The surge in technology highflyers in the past few months has created several situations in which companies own valuable stakes in former subsidiaries that may not be fully reflected in their share prices. One little-known situation involves Intermedia Communications, one of the CLECs, or competitive local exchange carriers, that have laid fiberoptic networks to compete against the Baby Bells and offer Internet services to businesses. Intermedia owns an 81% stake in Digex, a hot operator of Web hosting services for business that's now worth considerably more than Intermedia's equity market value. Here are the numbers: Intermedia, whose shares rose 1 1/8 to 30 15/16 last week, owns about 50 million shares of Digex, or roughly one Digex share for each Intermedia share. Digex rose 6 1/8 to 50 1/2 last week and has nearly tripled since its July IPO. Each Intermedia share controls about $50 in Digex stock. The negative implied valuation on Intermedia's core telecom business reflects investors' preference for pure 'Net plays and the high debt on Intermedia's balance sheet. Intermedia has about $3.3 billion in net debt (including preferred stock). But CLECs often get valued as a multiple of their plant and equipment. Put a modest multiple of 2.5 on Intermedia's telecom equipment and its primary business would be valued at about $20 per share. With the Digex stake, Intermedia would then be worth around 70 a share, more than double its current quote. Intermedia says it has no plans to spin off its Digex stake, but it could do so in the future. Be forewarned. Buying shares in companies with valuable equity holdings in other firms can be frustrating. Just look at Seagate Technology, the disc-drive company that owns a sizable stake in Veritas Software. Seagate, which closed Friday at 38 13/16 after falling a point last week, has a stake in Veritas worth $10 billion, or $45 per Seagate share. Seagate also has other equity stakes and cash worth $10 a share, plus interests in some potentially valuable private companies. And Seagate has a marginally profitable disc-drive business that could be worth another $20 a share. This all adds up to $75, nearly double Seagate's current price. Since Seagate was highlighted recently in Barron's (The Trader, November 20), it has barely budged, while Veritas has gained 12 points. As one reader said: "Every time you guys in Barron's highlight one of these situations, the right move has been to go out and buy the high-priced stock, not the cheaper one." Veritas may be getting a boost amid speculation that it will soon be added to the S&P 500. The company now is the largest component of the S&P 400 mid-cap index, a breeding ground for stocks that later are promoted to the S&P 500. In a momentum-driven market, Seagate and Intermedia simply cannot compete with their highflying offspring.