ICG may be down, but is it out?
The e-commerce company's stock has fallen almost 97 pct. from
its high. The company hasn't turned a profit, but it has a new
strategy for growth.
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Graphic: The rise and fall
By Wendy Tanaka and Miriam Hill
INQUIRER STAFF WRITERS
What do you do to survive when your stock
price has fallen nearly 97 percent in less than a
year?
When your biggest cheerleader turns against
you?
If you're Internet Capital Group Inc., you continue undaunted, just as you were a
year ago, when, for a brief shining moment, you were one of the 100 most
valuable companies in the country.
"We have never been more confident of what we're building," ICG's co-founder
and chief executive officer, Walter Buckley 3d, says.
"The market doesn't know that, but it will."
The Wayne firm has amassed a portfolio of investments in 80 partner companies
that, in turn, are developing software and other products so that industrial
businesses can buy and sell to each other through the Internet.
Its share price, which traded as high as $212 on Dec. 22 before closing that week
at $182.98, had dwindled by Friday to $7.09, a little more than $1 above its
split-adjusted initial public offering price.
Merrill Lynch, the lead underwriter on ICG's initial public offering, downgraded
the stock last week from "buy" to "accumulate." Henry Blodget, a Merrill Lynch
analyst and ICG's biggest booster, reversed his opinion of the company that
specializes in business-to-business, or B2B, e-commerce.
"The euphoria surrounding B2B created what . . . turned out to be incredible
excesses - outsized public and private company valuations," Blodget wrote in his
report on ICG's third-quarter results.
"And, in the case of ICG, a frenzied acquisition pace . . . bloated corporate
overhead, and a cash burn [rate] that could only be sustained in the most bullish of
markets. Today, the markets in general are not bullish, and the B2B market less
so. . . . We believe the stock could remain under pressure over the intermediate
term."
ICG won't admit to worries about its stock price, but the company recently
altered its investment strategy. It had planned to continue to fund most of its
partner companies, six of which are publicly traded, including VerticalNet Inc. of
Horsham.
But ICG has decided to focus its funding primarily on 15 of its private companies.
At the same time, Internet Capital plans to reduce its stake in other companies.
Buckley says the moves, announced earlier this month when it released dismal
third-quarter results, will allow ICG to press forward.
"We were in land-grab mode before," he says. "Our strategy has not changed.
Our mission is still to be the leading B2B e-commerce company. We're just now
in the second stage of that evolution."
Founded in 1995 by Buckley and Ken Fox, two former Safeguard Scientifics Inc.
executives, ICG began investing in business-to-business companies in 1996. To
date, ICG has invested $3.4 billion in 80 companies that do business in the
chemical, paper and plastics industries, among others.
At a conference for analysts who follow ICG in San Francisco last week, ICG
highlighted six of the 15 companies it considers most promising: ICG Commerce,
eCredit, RightWorks, AssetTrade, InvestorForce and Logistics.com.
"Our objective hasn't changed," Fox, ICG's managing director, said during the
conference. "The tactics continue to evolve. . . . One of the intents is to create
greater visibility of these companies. These companies are reaching an inflection
point" where they have gained significant market share.
ICG also spelled out six criteria for the companies it plans to keep in its portfolio:
They must be ranked first or second in their industries; have revenue of at least
$500 million; be in markets valued at $50 billion or more; have a top-notch
management team; reach cash-flow break even in 18 months; and generate
pre-tax profits of $100 million in three to five years.
"All of that makes sense," Rob McCord, president and chief executive officer of
the Eastern Technology Council, a business advocacy group in the Philadelphia
area, says.
"ICG led the way on B2B investing. Now it's saying. 'If you don't have a
believable path to profitability, we're not interested.' "
But sinking more money into only 15 companies might leave others shortchanged.
Buckley says ICG also provides management know-how and helps partners find
other sources of funding.
In the last three months, especially, "what we've tried to do is be up-front with
them in what they can expect from us," he says.
"Most of these companies are in pretty good financial shape. The most important
thing we can do is help them get to break-even cash flow as soon as possible.
Capital is much more scarce today than a year ago."
ICG says it has enough cash to stay afloat. At the end of the third quarter, the
company had $514 million in cash and marketable securities, and a $250 million
line of credit.
Despite its cash position, ICG also reported a third-quarter loss of $263.9 million
and slashed 50 jobs at its offices in Wayne, San Francisco, Boston and Seattle to
cut costs. Even before the third-quarter earnings were announced, ICG's stock
fell to $16.25 on Nov. 8 because Wall Street has grown impatient with red ink on
the balance sheets of Internet companies. Now, investors want to value these
companies on their ability to make money.
In addition to weak earnings, two other events have conspired to deflate ICG's
stock.
Major industrial companies, including General Motors Corp., are setting up their
own business-to-business exchanges, cutting out potential business for ICG. And
the implosion of the tech sector last spring has driven down the stock prices of
many companies. ICG and other business-to-business "incubators," such as
CMGI Inc. and Idealab, got caught in the downdraft.
The current malaise should have been anticipated by ICG, some say. After all,
e-commerce may be new-fangled but business cycles are as old as, well,
business.
"If they had accurately understood there'd be a cooling off of B2B, maybe they
wouldn't have done an aggressive land grab," McCord of the Eastern Technology
Council says.
Should ICG have had more foresight and employed more restraint?
"It's hard to have a crystal ball in terms of what will happen," Buckley says. "We
believe you'll need to ride through these waves."
Ed West, ICG's chief financial officer, who had held the same job at Delta Air
Lines Inc. before joining the Wayne company in August, says ICG is pursuing the
right strategy, despite the effects of the market.
"We couldn't have predicted the rise and fall of markets, nor do we spend a lot of
time thinking about it," he says.
Analyst Blodget of Merrill Lynch said ICG's latest moves to cut overhead and
sharpen its focus should help, but "they won't serve as a catalyst for the stock."
He said the company's shares will rebound only if its partner companies can show
profits, or if the private partners can raise money through the public markets. But
the IPO market, so active just a year ago, has slowed down considerably.
Most industry watchers are glad to see ICG taking steps to address the realities of
the marketplace.
"They're doing their best to make a new business model that can bring them to
some level of profitability," says James Cramer, who founded TheStreet.com and
is manager of the Cramer Berkowitz hedge fund. "The problem is, people don't
want to own that kind of stock."
Bob Turner, chief investment officer of Turner Investment Partners in Berwyn,
says ICG could survive if demand for business-to-business services grows and a
bull market returns.
If the market strengthens, "you're going to get a better IPO market, so some of
[ICG's partner companies] will go public," says Turner, whose funds hold a small
amount of Internet Capital shares.
If the stock prices of its public partner companies climb, ICG's stock would be
lifted as well.
"If VerticalNet goes from $20 to $40, obviously ICG's stock price does better,"
Turner said. Internet Capital Group holds a 28 percent stake in VerticalNet.
ICG needs to show that revenues and profits are not just circulating throughout its
80 partner companies, McCord says.
"The trick is to prove that people will use these Internet mechanisms at an
arm's-length basis, where the product or service is not being given away or being
sold to another wing of their family," he said.
Still, McCord reasons that ICG should be able to weather this downturn.
"This is one of the best-networked companies in the world in terms of access to
capital," he says.
"What you'll see from ICG is a broadening of ways to find cash and other exit
[strategies]. The problem for them is the IPO window," not management.
"It's safe to count ICG down," McCord says. "It's dumb to count them out." |
