Tech Week
In Sign of an Overheated Market,
Zapata Gets Back in the Net Game
By JASON FRY AND LISA BRANSTEN
THE WALL STREET JOURNAL INTERACTIVE EDITION
WHO SAYS there are no second acts in American corporate lives?
Houston's Zapata Corp., founded in 1953, isn't shy about reinventing itself: In
the 1980s, the oil company remade itself with a move into fish protein and
food-packaging. Then, in the mid-90s, the company fell under the control of
Florida financier Malcolm I. Glazer, a successful veteran of the real-estate and
broadcasting industries, a major shareholder of the Houlihan's restaurant chain
and the owner of the National Football League's Tampa Bay Buccaneers.
This year, Zapata decided to undergo another facelift, intending to remake
itself as an Internet giant. The company stunned both Wall Street and the
Internet world in May with an unsolicited $1.8 billion bid for search engine
Excite Inc., which was rejected, and then saw its $400 million bid for Web
directory WhoWhere? dismissed as well. Meanwhile, Zapata was taking out
newspaper ads offering to buy Web sites with an eye toward creating its own
portal site -- Zap.com. President and Chief Executive Officer Avram Glazer
was telling everyone who would listen that a planned spinoff of Zapata's
Internet operations could be one of the two or three most important Net
companies in the world.
But in October, with Internet stocks taking a beating, Zapata called the whole
thing off. Purchases of or investments in 31 Internet properties? Canceled.
That plan to spin off its Internet operations? Ditto. Going back to fish oil? You
betcha.
It looked like the New Year's resolutions at the Glazer house might have
something to do with not believing the Internet hype. But a funny thing
happened this fall: As the temperature plummeted, Internet stocks soared to
truly otherworldly levels. This week, Net-retail king Amazon.com Inc. and
online auctioneer eBay Inc. saw their share prices top $300, and uBid Inc., a
second-tier auction site, racked up share-price gains of more than $50 two
days in a row.
And this week, Zapata reconsidered having reconsidered. The Internet strategy
was on again. Zap.com was back in business.
It's a strange story, one that's drawn horse laughs from analysts and bitheads
from the beginning. But investors haven't laughed -- in fact, Zapata's share
price nearly doubled the second time the company announced its strategy. So
who's right?
Back in May, the laughter was widespread but unfair. Excite, confronted with
Zapata's out-of-nowhere bid, compared its market capitalization with its
suitor's and issued a tart press release saying it was declining to acquire
Zapata.
But the laughing techies were overlooking one minor detail: Fish oil, while not
a particularly glamorous business, is a profitable one. In the quarter in which
it bid for Excite, Zapata had profits of $58.1 million. For those not keeping
score, that's $58.1 million more in profits than Excite has made in its entire
existence. And even a cursory look at the Glazer empire would have shown
that it was built on dealmaking, not fish oil. With portal sites like Excite
striking deals left and right in May, dealmaking was the order of the day.
This is not to say that Excite and Zapata were a good fit -- they weren't. But at
the time, the laughter that greeted Zapata's ambitions had a lot to do with the
arrogance that circulates as freely as stock options in the high-tech industry,
and very little to do with Zapata itself.
Unfortunately, now that Zapata is determined to try again, the laughter is
justified. Zapata now has an Internet track record, and it's a grim one: The
company has shown zero acumen for the Internet industry and absolutely no
patience. At a time when the Internet game still demands plenty of frontier
spirit, Zapata has been totally unwilling to rough it.
The first indication that the naysayers might be right came in July, when
Zapata gave the market a peek at its plan for a portal site. The company's first
two acquisitions were the Webzines Word and Charged, two Web pioneers
whose luster had dimmed. To these two has-beens Zapata added a motley
collection of 20-odd never-weres. Zapata had grasped the idea that a portal
was an amalgamation of sites, but had somehow missed the point that the sites
had to be interesting.
That wasn't fatal -- one analyst pointed out that successes for just two or three
of Zapata's sites could make the whole enterprise worthwhile. But Zapata's
real failing was the way it turned tail and ran once Internet stocks came in for
one of their periodic bludgeonings.
This week Robert Keller, head of Hambrecht & Quist LLC's Internet
investment-banking practice, was damning -- and dead accurate -- about what
Zapata had done: "They saw this white-hot market and they wanted to dive in,
and then they saw the market retreat and they wanted to retreat as well," he
said. "If you have a dedicated strategy to leverage a new medium or a new
distribution channel for your business, then that decision should be
independent of the volatility of the financial markets."
Bingo. There are dozen of newly minted Internet moguls with paper fortunes
built on air, but none of them panic and run for cover when the rain comes --
as it inevitably does. They're in it for the long haul; so far, Zapata has shown
that it's in it to get rich quick.
Zapata has shown one quality of great
value to Internet investors: an eerie
accuracy at finding the beginning and
end of Internet-stock rallies. On July 6,
when the company proudly unveiled its
plan to launch a portal site,
Mecklermedia Corp.'s ISDEX index of
Internet stocks closed at 201.05 (A).
That turned out to be the culmination of
a two-month rally for Net stocks; by
August 1 the ISDEX was shy of 170 and
rapidly heading south. On October 15,
when Zapata called off its Internet
strategy, the ISDEX was languishing at
133.50 (B).
Since then, Internet stocks have surged
far above their July highs, reaching
unearthly heights. And so on Dec. 23,
with the ISDEX at 305.69, Zapata got
back into the Internet game (C).
Given Zapata's uncanny bad luck at picking its spots, what that means for
Internet stocks should be clear to anybody.
"You should basically be bringing the women and children indoors," said
Keith Benjamin of BancBoston Robertson Stephens. "This is getting scary." |
