From Bloomberg:
Comdisco Learns Different Moves on the Technology Dance Floor
By John Stebbins,
Rosemont, Illinois, March 5 (Bloomberg) -- Ken Pontikes started out 35 years ago selling computer punch cards for International Business Machines Corp. The son of Greek immigrants wasn't a computer whiz, but a savvy businessman who knew an opportunity when he saw one.
Pontikes had the simple idea of selling used mainframe computers to companies trying to save a buck. He started Comdisco Inc., short for Computer Discount Corp., in 1969 with a $5,000 loan from his father. Today it's a Fortune 500 company with a market value of $6.7 billion. Pontikes died in 1994, but not before preparing Comdisco for its next stage of growth.
Under current chief executive Nicholas Pontikes, the founder's 35-year-old son, Comdisco is steering away from being a used-car lot for computers and toward venture capital, fast Internet access and computer services. The effort is paying off. Comdisco shares have almost quadrupled from a year ago, and may rise more. ``They are in businesses that are growing rapidly, and we feel there is more potential,' said Mark Jordan, an A.G. Edwards analyst, who rates Rosemont, Illinois-based Comdisco ``buy/aggressive.'
Comdisco shares rose 9/16 to 43 3/4 Friday, a record closing price.
Internet Highfliers
One of the company's businesses drawing investor attention is Comdisco Ventures, which provides computers, networking equipment and financing to idea-rich but cash-strapped software, telecommunications and Internet startups in return for equity stakes. Comdisco is proposing a tracking stock for the unit.
Ventures' holdings are worth $2 billion to $3 billion, estimated Michael Grondahl, a U.S. Bancorp Piper Jaffray analyst. Grondahl rates the company a ``strong buy' and Friday raised his 12-month price target for Comdisco to 60 from 47.
Comdisco Ventures held equity positions in about 425 companies as of September. Sixty-five of those were publicly traded, including Internet highfliers e.Piphany Inc., which has surged more than 10-fold since its initial public offering, and Vignette Corp., which is up 24-fold. Comdisco also owned part of computer networking company Copper Mountain Networks Inc., whose shares have risen almost ninefold since its May IPO. The value of Comdisco's portfolio of publicly traded shares soared to $194 million on Sept. 30 from $40 million a year earlier. Between Sept. 30 and Dec. 31, Comdisco Ventures sold $93 million of the publicly traded securities and still held shares worth $435 million, Pontikes said.
With revenue from the equipment and services it provides to the startups, Ventures has been profitable for 12 of its 13 years even excluding the value of the shares, he said.
Following Venture Firms
Grondahl said Comdisco Ventures is comparable to CMGI Inc., an Internet and software investment company that has stakes in about 65 companies, such as Internet directory Lycos Inc. CMGI's shares have risen almost fourfold in the past year, valuing the company at about $3.6 billion.
Comdisco Ventures invests in companies based on its own research as well as recommendations from noted venture capital firms such as Kleiner Perkins Caufield & Byers and Benchmark Capital. ``We follow venture companies, so we invest in what they invest in,' Pontikes said. ``Right now, the hottest thing is the Internet and telecommunications. Before, it was biotech. If tomorrow it's pet stores, then we would follow them.'
Pontikes learned to spot good prospects after he dropped out of the University of Illinois before his senior year in 1985 and went to work on Wall Street in the mergers and acquisitions divisions of Drexel Burnham Lambert and Blackstone Group. In 1990 he co-founded an investment company, Avalon Capital Corp.
Return to Company
In 1992, then-No. 2 Comdisco executive Jack Slevin, who served as chief executive from 1994 to 1999 after Ken Pontikes' death, suggested that Nicholas Pontikes come back to the company. He had last worked there during school vacations in summer --cleaning, painting and refurbishing used computers.
His first job as an executive was to turn around Comdisco's underperforming disaster-recovery unit, which helps companies keep their computer networks running through fire, flood or human foul-up.
Most of the elements of a cutting-edge tech company, including Comdisco Ventures, already were there when he joined, Pontikes said. His job has been to make them more profitable or bring them to the attention of investors.
Some analysts consider computers -- Comdisco's mainstay -- to be yesterday's hot technology. Today, it's high-speed access to the Internet, or broadband. So Pontikes is making a move into broadband with a service called Prism.
Prism, which Comdisco acquired last year when it bought Prism Communications Services Inc., is one of the company's ``hidden gems,' Grondahl said. Comdisco intends to spin off the unit this year.
Digital Network
Prism is developing a digital telephone network that will
expand from the New York City-Philadelphia area to 33 U.S. and three Canadian markets by March 31. It will offer voice and data networks to small businesses and could be expanded to Comdisco's Fortune 1000 clients, Pontikes said.
Nortel Networks Corp., North America's No. 2 phone-equipment
maker, and Williams Communications Corp., owner of the fourth-largest U.S. fiber-optic network, each invested $10 million in Prism in exchange for 1 percent stakes, Grondahl said. He estimates Prism's value at $2 billion to $3 billion.
Most of Comdisco's revenue, though, still comes from its main
businesses: leasing equipment and providing technology services, which include design, installation and maintenance of corporate networks.
From fiscal 1995 to fiscal 1999, Comdisco revenue rose 85 percent to $4.16 billion and earnings rose 61 percent to $167 million. Pontikes wants to improve that performance, not only through Ventures and Prism, but by positioning the company's older businesses to take better advantage of the Internet.
Leasing Expertise
Comdisco's expertise is in leasing computers and equipment
used in telecommunications, medical and semiconductor manufacturing, Pontikes said.
Now, instead of buying the equipment and leasing it, Comdisco is exploring using the Internet to bring together companies that own equipment they want to get rid of with companies that need the equipment in an auction-type environment. ``Comdisco has a huge pipeline, great relationships and will be a great presence on the Internet when this develops,' Grondahl said. ``We have no risk in remarketing equipment owned by others, and eventually the risk assets that we do have will disappear and will be replaced with service.'
Comdisco also runs 50 disaster-recovery centers around the
world, which house computer, mainframe and storage facilities that companies use to keep their networks running if disaster strikes.
The centers are much like those of Exodus Communications Inc., whose stock has risen more than 14-fold from a year ago. The centers could prove a big revenue generator, Grondahl said. Comdisco plans to offer them to corporations to house their Internet-based business and software. Comdisco would set up the Web sites and maintain them in a safe environment. ``Analysts have a hard time understanding us,' Pontikes said. ``We have to make it easier for the street to say what we are worth.'
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