Anyone want to buy 10 tons of scrambled eggs?
Despite the cold roosts of the market, there are still a lot of fragile young start-ups out there that need a warm nest.
Internet Capital Group
have been the prized game hens of the Internet space for months. But will these empire builders be stuck with a sea of yellow mush if the market freeze doesn't snap?
Ignoring a mid-50s stock price that has about a third the value it had in early March, CMGI founder
wasn't bashful at last week's
Chase H&Q Technology Conference. Not only was he not freaking out, he demonstrated his ability to generate heat by bringing forward the profitability timetable for several of CMGI's little ones.
IPO, postponed in mid-April by market turmoil. Wetherell says the search-focused Internet pioneer will stay bundled up until the fall. Is that when he expects the IPO market to thaw? Not exactly. Wetherell says he isn't pegging his timing on the market. Instead, he says CMGI will wait for AltaVista to be on the verge of breaking even.
"AltaVista will be very close to profitability by then and in the meantime we'll be able to execute some business moves that will strengthen it," he said. T-minus three quarters and counting. Keep in mind that in the quarter that wrapped up on Jan. 31, AltaVista reaped $50.9 million in revenue, but had a sobering net loss of $272 million, which is typical of its recent quarterly performance, according to the company's S-1 filing with the SEC.
Wetherell rattled off a list of CMGI stars with new targets for profitability: online advertising network
(seven quarters); auction site
(four to five quarters) and personalized portal
(five quarters). Still, while it was refreshing to see CMGI discuss its start-ups getting in the black,
senior equity analyst
says we shouldn't blow a gasket over parent company CMGI and other rival holding companies doing the same.
"Looking for near-term profitability as an ongoing target is irrelevant," according to Mehta, who says his firm has done banking business with CMGI and ICGE. "They're creating value in a different way. ... You have to think about the reason we have investment companies, what they do, and why they succeed. Technology is a haphazard set of explosions all over the place. There's no predictability where the explosion is going to happen. When companies have the sudden realization that
is gonna be the big thing, you see the wheels start to move. But traditional operating companies aren't built to go after it. They have business models and earnings projections."
CMGI has about 70 mouths to feed, yet Wetherell doesn't seem worried about his ability to make ends meet. As of Jan. 31, CMGI had $881 million in cash and equivalents. At that more tranquil time for the market, it also had $2.38 billion in marketable securities. In addition, in its second-quarter results, CMGI hinted at the unspeakable, pointing out that excluding charges, amortization and the like, it would've earned a penny a share, or $1.3 million. Instead, it posted a net loss of 74 cents per share, or $186 million.
Crazy as it sounds, as benefits from stock sales slim down, CMGI's revenue won't necessarily do the same. "They don't need to watch the tape in horror," says
Steve Frankel of Adams Harkness
, which has done banking for ICGE, but not CMGI. "I don't think really anything changes in the CMGI story with the market down, other than instant gratification gets delayed."
Frankel explains that CMGI has
shares at its disposal, presenting an already amazing gain from its early investments in
. (Well before Yahoo! acquired GeoCities in early 1999, CMGI bought in on several early GeoCities financing rounds at 43 cents a share, 51 cents a share, $1.18 a share and $4.67 a share.)
The company's most recent quarterly results got a boost from the sale of $160 million worth of Yahoo! shares. "CMGI's ability to post revenues is not related to what's going on in the stock market. CMGI is giving birth and building companies rapidly. That will continue if the markets go up, down or sideways."
-- not to mention the dozens of smaller, regional incubator follow-ons of the world -- be able to do the same without the Yahoo! luxury? Idealab has shares of
to work with. But having a war chest of shares is only a piece of what it takes to play the incubator game. Observers say building companies that benefit from being part of a network is a big part of the game.
"CMG has gone from passively investing in companies two years ago to building companies from the ground up," Frankel says. "There's Engage and the whole advertising play. CMG Business Solutions is next. ... CMG's companies aren't just partnerships in name only. They're very deep working relationships."
Goldman Sachs' Mehta insists that herein lies the greatest value of a CMGI: the benefits of aligning with an influential holding company. "It's too late today to build out value in the network. People are going to ask you for an arm and a leg, compared to what they'll ask of CMG and ICG," Mehta says. "CMG has something like 71 companies. ICG has way over 50.
has 500. That stuff's phenomenal."
So, regardless of the market downturn, CMGI and those other established incubators may turn their start-ups into healthy, chirping chicks yet.
Tish Williams' column takes at look at the people who make Silicon Valley tick. In keeping with TSC's editorial policy, she doesn't own or short individual stocks, although she does own stock options in TheStreet.com. She also doesn't invest in hedge funds or other private investment partnerships. She breathlessly awaits your feedback at