CMGI
- IF A convincing case for these price levels can't be made, how can one have anything more than blind hope that the upward trend will continue?
That's a particularly troubling question for CMGI's chairman and CEO and largest shareholder, David Wetherell. For reasons we'll get into more deeply in a minute, Wetherell painted himself and his company into a corner in the belief that the recently soaring price of one of CMGI's most successful investments — Lycos Inc. — was not just momentum-fueled takeover speculation, but in fact represented real value to investors.
When Lycos' price thereafter tumbled in the wake of an unexpectedly low-ball merger bid from Barry Diller's USA Networks Inc., Wetherell suddenly saw CMGI's own stock price imperiled, and, after quitting Lycos' board, has now hired Morgan Stanley & Co. to find a merger partner willing to pay a higher price.
Just how difficult that will be to pull off is suggested by the fact that published reports are now quoting Wetherell as saying he might actually consider having CMGI buy Lycos outright — apparently for no other reason than to prop up CMGI's price, since there are no obvious synergies whatsoever to be realized from a merger of the two companies.
CMGI was trading for around $60 late last year, but by the close of business Tuesday, was above $194 per share.
Data provided by Microsoft Investor
Wetherell finds himself in this bind because, even though CMGI is more than just an investment company, it trades almost totally as a kind of closed-end investment fund for Internet startups. And it is the lofty valuations of the stocks in its portfolio — most notably Lycos — that, in turn, translate into the lofty price of the company's own shares.
In case you're not familiar with the company, Massachusetts-based CMGI has two basic lines of business: (a) a tele- and direct marketing operation, and (b) an Internet investing business.
CMGI, Inc. (CMGI)
price change
$190.75 -3.688
Full quote data:
price:
$190.75
change%:
-1.90%
volume:
5,271,500
day high:
$209.00
day low:
$190.25
Lycos, Inc. (LCOS)
price change
$108.75 +12.500
Full quote data:
price:
$108.75
change%:
+12.99%
volume:
5,863,500
day high:
$113.94
day low:
$105.00
USA Networks, Inc. (USAI)
price change
$37.06 -0.625
Full quote data:
price:
$37.06
change%:
-1.66%
volume:
907,200
day high:
$37.81
day low:
$36.69
Data: Microsoft Investor and S&P Comstock 20 min.delay
The marketing business, which is how the company began, is hardly worth getting excited about. Over the 16 months that ended last Oct. 31, marketing accounted for 82 percent of CMGI's net revenues of $131.5 million. Yet nearly two-thirds of those revenues came from just one customer — Cisco Systems Inc.
What's more, though marketing was operationally the only profitable part of the company, the segment's total operating income came to a mere $932,000 during the period, which translates into an operating ratio of a pathetic 1 percent — a number so meager as to be meaningless.
Normally, a company with such financials would be selling for no more than the breakup value of its balance sheet assets. After all, you could get a better return on your investment by simply shutting the business down, selling it for parts, and putting the proceeds in the bank.
But that is not how CMGI is being valued on Wall Street. Instead, CMGI sports a multiple of 58 times book value, 87 times revenues, and 153 times cash flow — and the reasons for that are the hoped-for payoffs to come from two of its best-known investments: Lycos Corp. and GeoCities Inc., plus the distantly shimmering promise of two IPOs that might be spun out of its incubator portfolio: Navisite and Silknet.
Unfortunately, clouds have now begun to gather over the GeoCities and Lycos deals, and the lengthening shadows they may soon be casting will inevitably fall upon the Navisite and Silknet IPOs as well.
YAHOO WAFFLES
The uncertainty surrounding the GeoCities deal involves the question of whether Yahoo!, the search engine company, will go forward as planned with its stock-for-stock merger with GeoCities, announced back in late January, if auditors, accountants and regulators do not grant the merger status as a “pooling of interests” combination.
As has been reported here (March 1, 1999) and elsewhere, the Financial Accounting Standards Board, which oversees accounting rules for public companies, is showing clear signs of sharply reducing — and perhaps even eliminating entirely — the use of “pooling of interests” treatment in mergers. These mergers have become increasingly popular as stock prices have reached extreme valuations, since they avoid the “purchase accounting” requirement that forces companies to take huge earnings charge-offs when businesses are acquired at prices far in excess of their balance sheet net worths.
Yahoo CEO frets over GeoCities deal
The fact that Yahoo cannot afford to take such charge-offs in the deal has prompted the company to disclose in a regulatory filing that, absent the granting of pooling of interests status, it may choose not to go forward with the GeoCities merger. And that in turn means that CMGI, which holds a roughly one-fourth interest in GeoCities, may wind up losing out on a payoff that some have figured could approach $1 billion.
Now an even more menacing cloud has gathered in the form of doubts about the prospects for the merger of USA Networks and Lycos, in which CMGI is the largest single shareholder, with a roughly 22 percent block of stock. When the deal was announced back in early February, many Lycos investors — including CMGI's Wetherell — grumbled that the price offered, which was not even up to the prevailing market price of $127.25 per share let alone the hefty premium that internet stock deals had lately been commanding, was simply inadequate.
Lycos has dropped from its highs amid doubts about the prospects for its proposed merger with USA Networks.
Data provided by Microsoft Investor
And when Lycos's stock price instantly thereafter came unstuck and tumbled all the way to barely $84 on worries that the deal might become derailed, Wetherell realized he'd been backed into a corner. If he supported the deal at that price, or anywhere near it, he would in effect be calling into question the valuations of the entire Internet sector — and thus, by extension, the sky-high market valuation of his own company.
Thus on Tuesday Wetherell announced that he was resigning from Lycos's board for the seeming purpose of being able to agitate actively on CMGI's behalf against the merger.
CMGI chief quits Lycos board
Wetherell's increasingly public reluctance to support the deal, when coupled with CMGI's announcement last week that it planned to take the two above-mentioned internet startups public through IPOs later this year, was enough to ease investor concerns about the stock and sent it soaring from $142 to $194 in just four trading days.
But the euphoria could prove short-lived because by backing away from the USA Networks deal, Wetherell has in fact achieved nothing but to postpone, perhaps briefly, the day of reckoning.
The problem Wetherell now faces is not that the USA Networks offer was too cheap. No, the problem is that the USA Networks offer has turned out to be the best Lycos could scare up after shopping itself to a number of potential investors, including it was widely rumored, NBC, the joint venture parent of MSNBC.
Wetherell's decision to resign from Lycos's board of directors in order to oppose the deal simply reflects the obvious fact that, from Lycos's point of view, there is no reason to oppose USA Networks' offer — indeed, that by doing so he would be possibly violating his fiduciary duty to Lycos's shareholders in general.
So he chose to step down from the board and take up the more particular cause of his own company, CMGI, which needs to get a higher price for its Lycos shares than the market is prepared to offer — all in order to prevent CMGI's own shares from keeling over.
But how will he avoid the final reckoning? How will he scare up a better offer, and from whom, when the best Lycos could get is now perceived as not good enough from CMGI's point of view? He'll be bargaining from a position of evident and obvious weakness, and if he's not careful he could find his own company on the hot seat. This is definitely an unstable situation, and its outcome could wind up directly affecting the stock prices of not just Lycos and CMGI but the whole Internet sector.
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