VocalTec's Lone Voice on the Street May Be Its Investment in ITXC

If ITXC were snapped up, VocalTec would finally reap the desserts of an investment that started with seed money in 1997.
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SAN FRANCISCO -- After inventing the Internet telephone and watching giants steal the business,

VocalTec

(VOCL)

might wring a little salvation from Wall Street -- thanks to one investment it made along the way.

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VocalTec owns a 16% stake in the Internet telephone carrier and customer

ITXC

(ITXC)

, according to a trader and equity analyst. ITXC has tripled in six weeks to 39 from its offering price, placing VocalTec's stake at roughly $217 million -- more than VocalTec's entire market capitalization of $152 million.

Put another way, ITXC is worth $19 per VocalTec share, while VocalTec, of Herzliya, Israel, currently trades at 13 1/4.

"We watch it and just shake our heads," says CEO Tom Evslin of ITXC and a former board member of VocalTec. Evslin wouldn't speculate on when the gap might close, but says it's another case of investors focusing keenly on a company's operations and discounting its holdings. In the third quarter, ITXC's revenue rose 20-fold to $6.5 million from the year-ago quarter. VocalTec's rose 4% to $6.8 million in the same period. Small wonder that some see ITXC as a prime candidate for a takeout. Small wonder also that ITXC's shares are such a windfall for VocalTec's balance sheet.

"It seems that investors are willing to recognize these types of assets," says Phil Leigh, an analyst at

Raymond James

. For this reason, Leigh has a buy rating on

CMGI

(CMGI)

, which tends a portfolio of lucrative Internet investments. Leigh rated VocalTec a hold before changing coverage last spring, when ITXC was still private. His St. Petersburg, Fla.-based firm has no banking ties to CMGI, ITXC or VocalTec.

In 1995, VocalTec released the first software that allowed people to converse through PC microphones without paying long-distance calling charges. But VocalTec has lost to the marketing muscle of

Cisco

(CSCO) - Get Report

,

Lucent

(LU)

and

Nortel

(NT)

. Carriers will invest $700 million in Internet telephone networks in 1999, nearly four times last year's levels, according to the consulting firm

Frost & Sullivan

.

And VocalTec will claim less than $30 million from that pile. Its shares, after streaking to 30 in October 1997 from 6 in May 1997, have since slumped. After years in the red, profits still aren't happening. The company posted a loss of 49 cents a share in the third quarter, compared to a 34-cents-a-share loss in the same quarter last year. On Monday, Elon Ganor, the company's chairman, said he's reassuming his seat as CEO and replacing the short-lived CEO Doron Zinger.

The two companies rate quite differently in Wall Street's estimation. While VocalTec has developed promising new uses of its software, many still view it as a

Nasdaq

old-timer that has disappointed. VocalTec is valued at $152 million or 6 times revenue for the trailing four quarters, while ITXC trades at $1.4 billion or 93 times revenue.

Against this backdrop, investors are ignoring Ganor's success as a venture capitalist. VocalTec can't sell ITXC until next spring, and would pay taxes on the gains. Even in today's high-rolling market, investors find it risky to play one volatile Internet stock as a proxy for another. So the gap is waiting to close. One trader asks, "What's going to bring it together?"

For some other communications-equipment companies, the answer has been acquisition. The trader profited on the wireless-systems company

Telxon

(TLXN)

, part owner of the start-up

Aironet Wireless

(AIRO)

. Telxon spiked 15% Tuesday when Cisco said it would acquire Aironet for $800 million in stock.

Shares of

Advanced Fibre

(AFCI)

enjoyed a similar boost from its

stake in

Cerent

, which just this month folded into Cisco for stock worth a staggering $7 billion. It's not just equipment companies that are consolidating. The forces to merge also are pressuring carriers such as ITXC. Evslin won't speculate on a buyout, but hints that it's not out of the question. "In the end, the biggest network wins," he says. "You can't say internal growth is necessarily going to be enough."

"ITXC holds a lot of value for a suitor," says Pete Dailey, managing partner with

Frost & Sullivan

, which has consulted for VocalTec but not ITXC. The local-phone company

SBC

(SBC)

in particular might benefit by absorbing ITXC's long-distance networks in the U.S. and Europe, he says. An SBC official declines to comment on the possibility.

If ITXC were snapped up, VocalTec would finally reap the desserts of an investment that started with seed money in 1997. ITXC responded by building VocalTec servers and software into its network, although it has since deployed Lucent and Cisco equipment as well. In July, ITXC's Evslin grew busy with his own upcoming IPO and resigned as director of VocalTec. VocalTec's Ganor, who wasn't available for comment, remains on ITXC's board. (

Flatiron Partners

holds stakes in both ITXC and

TheStreet.com Inc.

(TSCM)

, publisher of this Web site.)

VocalTec and ITXC still cooperate -- for example, winning business with

China Telecom

in the spring. But for now, it seems the best way for VocalTec to benefit from ITXC is to simply hold onto its shares.