ICGE comments..........
ICG refocuses vision amid sour markets
From Knowledge@Wharton
Special to CNET News.com
December 16, 2000, 6:00 a.m. PT
Like so many Net companies, Wayne, Pa., holding company
Internet Capital Group was a high-flyer in 1999. Going public
that August at a split-adjusted price of $6, ICG jumped in one
day to over $12, then climbed to $212 by late December.
But ICG, which now has stakes in 80 business-to-business Internet companies, has
fallen with
the Net group this year, recently hovering around its $6 IPO price. In mid-November it
announced a 35 percent staff cut. Some Wall Street analysts have downgraded the
stock.
One of ICG's biggest boosters, Merrill Lynch analyst Henry Blodget, turned on the
company in
a mid-November report to investors, accusing it of a "frenzied acquisition pace" that
caused it
to invest in companies at excessive prices. ICG, he said, had "bloated corporate
overhead and
a cash burn that could only be sustained in the most bullish of markets."
ICG lost nearly $264 million in the third quarter, and its chief source of new funds, IPOs
for its
partner companies, has dried up. From the outside, things don't look too good. But how
do
they seem from the inside?
Beth Kaplan, an ICG managing director for operations, told Wharton students Nov. 30
that
ICG's future is not as grim as it might appear. The company has recently gone through an
extensive restructuring, expects to retain most of its portfolio of companies and should
rebound
if market conditions improve so that some holdings can be taken public, she said.
All 80 "partner" companies were evaluated this fall, Kaplan said, and ranked according
to their
prospects. Fifteen or 20 companies probably will get no more cash from ICG, but those
companies will continue to get other ICG services, such as recruiting help. "We had to
go to
those companies and have the honest conversation….Hey, you're a great company, but
we're
not going to fund you anymore….That was not fun," she says. ICG has said it will
concentrate
its efforts on its 15 most promising companies.
Kaplan joined ICG earlier this year after four years at Rite Aid, where she most recently
was
senior executive vice president for marketing and merchandising. From 1981 to 1996
she was
at Procter & Gamble, spending her final four years there as president of the Noxell
Division, the
cosmetics and fragrance unit.
Heavy on B2B
All of ICG's companies are in business-to-business Internet services, ranging from
Agribuys, a
California firm that helps food companies obtain services, to Farming Online, a British
provider
of agricultural information, to Traffic.com, a Philadelphia company that collects and sells
highway traffic data. It was founded in 1995 by Walter W. Buckley III, a former vice
president of
acquisitions for Safeguard Scientifics, and Kenneth A. Fox, formerly Safeguard's
director of
West Coast operations.
A typical venture capital company invests in unrelated start-ups, seeing each as a distinct
investment that may be "flipped," or sold, after it's taken public. But ICG expects to
remain
active in most of its holdings for at least 10 years, Kaplan said. In most cases, ICG has a
35
percent stake.
Cross pollination
To create synergies between ICG companies, each, in addition to cash, gets
management and
other professional assistance from ICG. The companies are also given special
opportunities to
do business with one another, Kaplan told the students. The typical ICG company is in a
large,
fragmented business with opportunities to make large profit margins, she added.
Synergy is enhanced by nurturing holdings in three areas. Vertical market makers are
companies that specialize in individual industries, such as consumer products, health care
or
transportation. They are companies that make money selling products or services or by
charging transaction fees. ICG helps these companies use the Internet to streamline
procurement, reduce transaction costs, speed distribution and automate customer
support.
A second group, horizontal market makers, is composed of companies that each serve a
variety of industries. Some of these companies serve customers' human resources needs,
aid
them in acquiring used equipment or sell excess inventory. The Internet can be used to
help
these companies reach scattered customers, Kaplan said. A third group, technology
infrastructure companies, provide customers in wide-ranging industries with things like
financial
and procurement services. These, too, can make operations more efficient by using the
Internet, Kaplan said.
ICG in the mix
ICG puts executives on its companies' boards and advises on business strategies and
day-to-day operations. ICG also helps find executives for the partner companies.
Kaplan told the students that soaring Internet stock prices last year were bound to be
followed
by a downturn, as the long-term strategy of a company like ICG could not produce
results
quickly enough to justify investors' inflated expectations. "These are still really, really
young
companies," she said of ICG's partners. "Building these companies is more of a journey
than
an event."
Nonetheless, she acknowledged that ICG has had to revise its strategy. A year ago, the
goal
was to help the partners grow as fast as possible on the theory that profits would
inevitably
follow.
"Well, it didn't turn out that way," she said. The downturn in technology stocks has
caused
investors to focus much more intensively on profits, or the prospect of profits, and ICG
is doing
the same, she added.
Many young companies can choose when to become profitable by controlling investment
aimed at expansion. "You have some very interesting, stimulating conversations about
when is
it right to turn profitable," she said. "You've got to have a high degree, in this
environment, of
intellectual honesty."
One of the companies she oversees is Traffic.com, which collects data from an
expensive
system of towers along major highways. "That company's not going to be profitable
anytime
soon, and it shouldn't be," she said, noting that to dominate the market it must make
enormous capital expenditures and must do it ahead of any competitors.
Straight talk on ICG
Managers of young companies tend to have boundless enthusiasm, which is good, she
noted.
But one of ICG's roles is to be "brutally honest about what you can and cannot do."
Kaplan was brutally honest about ICG as well. If the now-dormant market for Internet
IPOs
perks up, ICG will be able to raise money in the public markets, which it tried
unsuccessfully to
do last summer. She predicted a tough first half in 2001, but she said the IPO market
may perk
up in the second half.
"The company never should have had a $212 stock price," she said in describing the
bubble
that carried many technology stocks too high last year. She predicted that ICG shares
will go
far above the current $6 range but added: "Do I think it will be a $200 stock in my
near-term
lifetime? No." |
