A Once-Hot Incubator Making A Comeback Despite Dot-Com's Fall Internet
Capital Rebounding Company almost crushed when B2B field crashed, but proved
to be survivor
By Jed Graham
December 7, 2001
Once upon a time, Internet Capital Group had a $ 50 billion market cap, more
than a billion in the bank and countless friends and family - not to mention
investment bankers - eager to share its IPO bounty.
But the Pied Piper of B2B long ago lost its following.
"Nobody wants to call anything 'B2B' today," said CEO Walter Buckley, who on
Thursday was named to the additional post of chairman.
With the company's shares trading at just over a buck, down from 212 in
December 1999, few people seem to be paying attention. Just three Wall
Street analysts cover the firm vs. nearly 20 a year ago.
At first blush, the Wayne, Pa.-based company might be seen as one of the
tragic figures of the free-spending dot-com era. But Internet Capital has
played a much different role for more than a year: survivor.
As 2001 ends, the Internet incubator, with a stable of more than 50
portfolio companies, is well on its way to exceeding its cost-reduction and
cash-level targets for the year, analysts say. What's more, four of its 15
key private holdings are at or near break-even, and the other 11 are on
track to get there next year.
CFO Pared Spending
Even if the IPO market, a key source of capital for its firms, remains shut
longer, the company can persevere, analysts say.
"We're focused on delivering results and establishing long-term
credibility," said Internet Capital's Ed West, who is adding president and
chief operating officer to his role of chief financial officer.
West, who arrived in August 2000 after serving as CFO of Delta Air Lines,
has helped instill discipline at a company that burned through about $ 800
million - mostly by its investments - in the first half of 2000.
The slimmed-down parent has since reduced its operating expenses 70% to
about $ 20 million a year.
In addition, last month Internet Capital took advantage of the weak
financial markets to buy back $ 120 million of its $ 566 million in
convertible bonds at less than 30 cents on the dollar. That will cut $ 6.6
million a year of its interest expense on the debt, which is due in December
2004 (see related story, this page).
As it stands, Internet Capital should close the year exceeding its goal of $
200 million in liquid assets, despite paying $ 38 million to buy back debt.
"We believe the company has taken solid steps to improve its balance sheet
for extended tough market conditions," Merrill Lynch & Co. noted in a recent
report.
One key aspect of that effort has been the company's willingness to sell
some investments, sometimes at a substantial loss, while ceasing to fund
others. In the third quarter, it raised about $ 150 million by selling
stakes in four companies. Four other holdings ceased business.
"We've had to make tough decisions," Buckley said, even pulling the plug on
some investments that might have panned out in the long term.
Now that cash burn is under control, the question becomes: "Do they have any
viable private companies?" said William Blair & Co. analyst David Farina. He
thinks "there is real value" in that portfolio, and views Internet Capital
as "an interesting speculation."
One thing in the company's favor, Farina said: "The quality of the people
they brought in" when its stock options were still a big draw.
Holdings Have Momentum
Among the 15 relatively mature firms that Internet Capital calls its
"developed partner companies," revenue rose 98% year-over-year to $ 71
million in the quarter ended Sept. 30. Their combined operating losses fell
34% to $ 55 million.
"What we're seeing sort of goes against the industry trend," Buckley said.
"We're feeling as confident about the overall landscape as we have in a long
time."
One reason Buckley is encouraged is that the online business-to-business
shakeout has reduced competition. Two years ago, about 20 companies were
fighting to survive in the market for buying and managing transportation
services, he says. That's down to single digits now.
Internet Capital's entry in the sector, Logistics.com, has won business in
recent months from Staples, Gillette, The Limited and Rite Aid.
AMR Research analyst Michael Bittner says Logistics.com "would be on my list
of (eventual) survivors" in the consolidating category.
While Internet Capital doesn't break out the results of individual portfolio
companies, Bittner said, "it seems like (Logistics.com is) doing reasonably
well."
That cautious praise is counter to the hype of two years ago. But Internet
Capital has learned some things.
"We've stayed the course," Buckley said. "The one thing we can do is focus
on where we can create the greatest value. We don't have regrets, but we've
learned a lot about what works and what doesn't, and that's to our
advantage. We're a lot smarter than we were 18 months ago." |
