Chemdex Looks Within for Expansion

Hats off to Chemdex (CMDX) for showing Wall Street how a little more can become a lot more. Put differently, some companies go out and buy lots of new companies and demand a higher valuation. Others, like Chemdex, simply say they're going to become lots of new companies, and Wall Street obliges them all the same.

Chemdex now wants to be known as Ventro, which sounds more like a hip restaurant in San Francisco's South of Market neighborhood than a Web company focusing on the gritty industrial world. From one online marketplace for life sciences equipment (the stuff professional laboratory researchers use), Ventro, nee Chemdex, immediately will become four marketplaces with plans for more, more, more. The key to understanding Chemdex's financial wizardry is that each "vertical" -- the name given to a commerce Web site focused on one narrow industrial market -- has the potential to be a separate company.

The bottom line is that Chemdex is the epitome of every trendy development in the tech-stock world today: business-to-business e-commerce, tracking stocks that carve out value within the firm and the willingness to shift business models at the drop of a hat. This likely explains why investors bid up shares of Chemdex (the ticker changes to VNTR on March 1) 35 1/4, or 29%, Tuesday to 155 1/4 despite the fact that "no financial transactions are associated with the formation of Ventro,'' according to the company. This Mountain View, Calif.-based firm that Wall Street expects to have $140 million in revenue this year now is valued at $5 billion.

In addition to life sciences equipment, Chemdex/Ventro's existing vertical marketplaces include specialty medical supplies (Promedix), industrial processing equipment (Industria, in which CMGI (CMGI) and DuPont (DD) are investors) and high-volume medical supplies (an unnamed joint venture with Tenet Healthcare (THC)).

David Perry, Chemdex's CEO, notes that the new company aims to be like Internet Capital Group (ICGE) in that it will invest in numerous categories that have in common only a business-to-business focus. Perry says Chemdex "only will enter a market where we can be the winner." Thus the ever glamorous steel industry is off limits because of eSteel and MetalSite, two private concerns.

For now, Chemdex remains an early stage company. Its gross margins are hovering around 5% (talk about steel-company-like economics), though Perry notes that Wall Street expects the figure eventually to improve to 10%. He says the renamed firm will add six additional marketplaces by the year-end, though he's mum on which ones.

My question: If B2B isn't hot come year-end, what will Ventro morph itself into then?

Banner Ads in Aisle Five

America Online (AOL) said Tuesday it had signed a $60 million deal with soon-to-be-public HomeGrocer.com, the Seattle-based competitor to Webvan (WBVN), Peapod (PPOD) and other online grocery stores.

The news came from AOL, of course, because HomeGrocer is in registration with the Securities and Exchange Commission and therefore can't ballyhoo its own business deals. AOL can, though. And should. What AOL gets is $60 million over five years from HomeGrocer.com. What HomeGrocer.com gets, with limited exclusivity (meaning that AOL can do less prominent deals with other grocers), is promotion on numerous AOL sites, including its Digital City local sites. As HomeGrocer primarily operates for now in the Pacific Northwest and in Southern California, any advertising broadcasted over AOL's prodigious network simply will vanish into the ether.

To HomeGrocer's benefit, it didn't give up any equity to AOL, the pound of flesh the Dulles, Va., company is particularly adept at extracting in situations like this. To HomeGrocer's detriment, it's paying an awful lot of money -- $18 million in fiscal 2000 alone, according to a HomeGrocer filing with the SEC -- for ads that initially will hit a lot of noncustomers. The deal also contains provisions whereby AOL can eliminate or reduce HomeGrocer's limited exclusivity after two years.

One final note: This deal is a perfect example of the Internet keiretsu at work. Remember, HomeGrocer is a full-fledged member of the Kleiner Perkins-Morgan Stanley-Amazon.com keiretsu, to which venture firm The Barksdale Group also belongs. Former Netscape CEO James Barksdale is on the board of AOL and HomeGrocer; his venture firm is an investor in the former company.

HomeGrocer will dedicate a small portion of its $242 million it hopes to raise in its IPO to paying off a deal with AOL. Follow the money: Keiretsu banker (Morgan Stanley) raises money for keiretsu company (HomeGrocer) which pays a tangential keiretsu member (AOL) as well as an investor and keiretsu member (Amazon). HomeGrocer, by the way, is paying Amazon, its largest shareholder, $10 million for advertising.

Cisco's Really Expensive Employees Aren't the Ones It Buys

Value-per-employee figures for one company were conspicuously missing from a piece here Tuesday about how much Cisco Systems (CSCO) is paying to buy engineers. The absent company? Cisco itself.

The San Jose, Calif.-based equipment maker has paid on average $3.5 million per employee in its recent acquisitions. That means that it pays slightly more for each engineer, the true object of its affection when it swallows a company with no products or revenue. Is $3.5 million worth it? Well, it's cheap compared with Cisco's own employees. At Tuesday's market value of $424 billion, Cisco's 26,140 employees are valued at more than $16 million each to Wall Street.

Think about that for a moment. Investors expect, on average, each Cisco employee to generate $16 million of value. Cisco generates about $666,000 of revenue annually for each employee, based on the annualization of its $4.35 billion in revenue for the second fiscal quarter ended Jan. 31. That means it will take a generation for each employee to account for in sales what investors will pay in market value.

These are the times in which we live.

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