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Technology Stocks : Compaq -- Ignore unavailable to you. Want to Upgrade?

To: Bazmataz who wrote (55788)	4/6/1999 12:54:00 PM
From: Steven N	Read Replies (1) \| Respond to of 97611

Is Compaq crazy? REREAD THIS By David Simons Red Herring Online February 22, 1999 Since January, Compaq (CPQ) has committed more than $500 million to Internet acquisitions: $200 million for Shopping.com (OTC: IBUY), a second-tier online retailer whose stock has a checkered regulatory history, and a reported $300 million for privately held Zip2, which provides local portal and e-commerce systems for newspapers. And the spending spree may not be over. Compaq's basic plan is to ally new acquisitions with AltaVista, the search service it acquired in the 1997 buyout of Digital Equipment Corp. Compaq has been spending mightily to morph AltaVista into a full-fledged portal to compete with Yahoo (YHOO). Why? Relentless decline in PC prices, particularly in the consumer market, threatens revenue and profit growth for all computer manufacturers. Compaq sees the Internet and continuing revenue streams from it as an antidote. NOT A PLAN Compaq began in June of last year by offering Compaq.net, a branded access service provided by GTE (GTE). Since then it has been pursuing the PC's potential as the "ultimate portal." You can see this strategy in Compaq's relationship with AltaVista, which had been a footnote in the DEC deal until Compaq configured its consumer PCs to put Compaq Internet services right in the faces of new owners -- via set-up selection screens and a keyboard cluster of Internet buttons. Compaq's stated objective is for its amalgam of Internet acquisitions to become "one of the top three revenue sites on the Net by year-end 2002." So far, Compaq's plan reflects more the handiwork of investment bankers, corporate committees, and consultants than the essential soul of Internet entrepreneurship. Indeed, rationale for the purchase of Zip2 is right out of the consultants' playbook. The idea is that because most consumer purchases are made locally, local e-commerce is a must-have. But America Online (AOL), Microsoft (MSFT), and a gaggle of others have been pursuing that notion for three years at enormous cost -- and only modest success. Plumbers, beauty salons, and even groceries are likely to remain off the beaten path of consumer e-commerce. COMPAQ PAID DEARLY Compaq's $200 million Shopping.com acquisition is in cash. Reportedly, the $300 million Zip2 buy is, as well. But most major acquisitions of Internet companies -- especially public ones -- have been by other Internet companies and paid for with their red-hot stocks. Because of the risk inherent in stock, acquisitions paid with it usually are at a premium to what would be the cash price. For example, had Amazon.com (AMZN) bought Shopping.com for stock, the equivalent dollar value in shares would have been at least $400 million, double the $200 million cash paid by Compaq. That would be 50 times Shopping.com's run rate sales. By contrast, Amazon stock at its all-time high in January traded at 30 times forward sales. In effect, Compaq's valuation of an Amazon also-ran was 66 percent richer than the real thing -- and twice more than Amazon's current price/sales ratio of 15. But Compaq couldn't pay in stock. At a modest 25 percent premium to cash, Compaq earnings would have been diluted 9 percent by the Shopping.com acquisition alone. That's no problem for Internet companies, which are valued far more on revenue than profit. But it would have seriously soured Compaq shareholders. Compaq's justification of the $500 million outlay was backhanded. The company said it plans to spin off its collection of Internet properties within a year. That would suggest an IPO of an initial 20 percent of a billion-dollar market capitalization. $200 million would be the largest Internet IPO to date. Of course, that presumes Compaq's Net properties perform respectably in the meantime, and that the market for Internet IPOs remains vibrant. The latter is an especially risky presumption. If Yahoo or Amazon acquires a company for stock and the acquisition doesn't bring the anticipated benefits, direct loss is mainly the post-acquisition resources expended in trying. If stock market conditions nix an IPO, and Shopping.com or Zip2 stumble, Compaq is out $500 million of hard cash. ANOTHER BIG QUESTION Is a PC manufacturer genetically suited to compete in providing Internet services? The businesses are vastly different -- a gulf wider than the notion of Microsoft manufacturing PCs or Intel (INTC) doing software. IBM (IBM) has spanned it, but only in corporate computing. Yet Compaq put its senior VP of consumer PC products, Rod Schrock, in charge of the company's portal pursuits. Compaq's focus on Internet services becomes more perplexing in light of passed-over alternatives more in line with Compaq's strengths. Despite the expectation of mass markets for Internet appliances as alternatives to PCs, Compaq hasn't been at all aggressive about moving into mainstream consumer electronics. $500 million cash would buy a major foothold in the beleaguered electronics behemoths of Southeast Asia. Yet apart from producing a handheld PC, Compaq's moves in the non-desktop space have been muted. There are no formulas for Internet success, only for failure. Success on the Internet derives from abiding passion and astute agility. Compaq appears to being relying on formulas. David Simons is managing director of Digital Video Investments. Compaq announced in January that it would spin out AltaVista.