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Chemdex Looks Within for Expansion

Also, AOL inks another deal, and determining the value of Cisco's employees.

Hats off to



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


they're going to


lots of new companies, and Wall Street obliges them all the same.

Chemdex now wants to be known as


, 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 (


), industrial processing equipment (


TheStreet Recommends

, in which





(DD) - Get DuPont de Nemours, Inc. Report

are investors) and high-volume medical supplies (an unnamed joint venture with

Tenet Healthcare

(THC) - Get Tenet Healthcare Corporation Report


David Perry, Chemdex's CEO, notes that the new company aims to be like

Internet Capital Group


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




, 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?

America Online


said Tuesday it had signed a $60 million deal with soon-to-be-public

, the Seattle-based competitor to






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 What 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


at work. Remember, HomeGrocer is a full-fledged member of the

Kleiner Perkins-Morgan


, 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:


banker (Morgan Stanley) raises money for


company (HomeGrocer) which pays a tangential


member (AOL) as well as an investor and


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) - Get Cisco Systems, Inc. Report

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.

As originally published, this story contained an error. Please see

Corrections and Clarifications.

Adam Lashinsky's column appears Tuesdays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at