Can Cmgi Stop The Bleeding?

Suddenly, Chairman Wetherell wants profits, not projects

When New England Patriots owner Robert Kraft announced on Aug. 21 that CMGI Inc. had bought the naming rights to the Patriots' new football stadium, he offered an unusual revelation. Noting that he had owned CMGI stock for years, Kraft said he had been buying up the company's battered shares "every day for the last 60 days." Standing beside Kraft, CMGI Chairman David Wetherell clearly appreciated the vote of confidence.

Wetherell knows he'll need much more than an atta-boy from Kraft to turn investors into fans again. After peaking at $163 in March, CMGI's stock tumbled 75%, to about $41. That's why Wetherell is moving ahead with a plan, unveiled on Sept. 7, that focuses the company less on generating investment gains from Internet startups and more on improving the performance of the 70 companies in its portfolio. Beginning with its earnings announcement on Sept. 21, CMGI will consolidate the 17 companies in which it has a controlling interest around five lines of business and offer far more detailed information on their financials. The groups include interactive marketing,enabling technologies, search engines and portals, e-business fulfillment, and Internet professional services. The performance of its CMGI @Ventures venture-cap fund will be broken out separately, too. CMGI has dropped plans to launch a new $1.5 billion international venture-capital fund.

All of the changes are aimed at one new target: profitability. By merging businesses and selling off ones that don't mesh, CMGI says over the next few years it will reduce its 17 majority-owned companies to around 5 to 10 firms. For the surviving ones, CMGI plans to decrease costs and help them be more efficient by taking advantage of group buying power for everything from telecom services to software. Wetherell claims the new bottom-line focus will cut its $50 million a month burn rate significantly, helping CMGI's key companies reach the break-even point in the next year. "We've asked [our companies] to come back with plans that would improve their path to profitability," says David Andonian, CMGI's president of corporate development.

Wetherell's moves buy the company time. But if the market doesn't turn around and CMGI has to rely on generating profits from its operations, it will have trouble justifying its lofty $12 billion market cap. Observers greet the new strategy with mild applause. "I think it's good because it shows a fundamental shift in the way the company is run," says analyst Phil Leigh, of Raymond James & Associates. Steven M. Appledorn, a portfolio manager at Munder Capital Management, which holds roughly 2 million CMGI shares, warns: "We're going to want to see positive trends in their key operating businesses."

NO SURE THING. The company's future is anything but assured. There are serious questions about the prospects of such core CMGI holdings as Web advertising specialist Engage and AltaVista, a portal that competes with the likes of Yahoo! and America Online. Plus, recent investments--including e-shops and not turned to gold under the Wetherell touch. As a result, CMGI's Internet operations lost $1.4 billion on revenues of $383 million in the nine months ended on Apr. 30. And losses are growing. For the most recent quarter, ended Apr. 30, CMGI reported a loss of $715 million, up from $412 million the previous quarter.

Despite its Net-age profile, CMGI's best-performing unit is fuddy-duddy Old Economy. SalesLink, CMGI's fulfillment service, packages routers into cardboard boxes for Cisco Systems Inc. For the first nine months of CMGI's fiscal year, this unit earned a respectable $7.9 million on sales of nearly $120 million.

Until this spring, CMGI flourished by exploiting the arbitrage between private and public valuation of Internet properties. It bought shares of home runs like Lycos and GeoCities early and cheap, then sold shares at inflated prices. In the nine months ended on Apr. 30, CMGI realized more than $1 billion in sales of appreciated investments. Those funds then financed money-losing operations such as AltaVista, Engage, and NaviSite. Meanwhile, CMGI's soaring stock financed takeovers that swelled revenues. Since January, 1999, CMGI has spent a staggering $13 billion on acquisitions--nearly all paid for with its own stock.

The formula worked marvelously--for a while. In April, the Nasdaq meltdown rocked CMGI shares and dimmed the IPO prospects of several CMGI wards. At least five--AltaVista,, NaviPath, iCast, and to back off IPO plans. Other CMGI holdings, frozen out of public markets, needed cash infusions. CMGI, along with Compaq, anted up $75 million for Engage. CMGI also pumped $25 million into, after its spring IPO was stalled. NaviSite, the public Web hoster still 70% owned by CMGI, had to suspend a secondary offering.

Now, Wetherell's challenge is formidable: to stop the bleeding in two of CMGI's biggest operations--AltaVista and Engage. Engage tracks the movements of Web surfers and helps advertisers place ads and gauge their effectiveness. For the first nine months of this year, Engage had an operating loss of $72 million, on sales of $110 million. To reach the black, Engage will cut marketing costs; and it's mulling layoffs. "Short term, it's a tough market out there," Wetherell concedes.

AltaVista is in almost as much trouble. A second-tier portal, it is dependent on advertising dollars in a market that strongly favors top-tier players such as Yahoo! and AOL. Yahoo! commands about a 25% premium in ad rates over second-tier portals, according to the Internet reseach firm eMarketer. With many dot-com advertisers, who account for most online ads, facing uncertain futures, Web properties will need to line up traditional consumer-goods advertisers. But many of these, including General Motors and Ford, already have chosen Yahoo! and AOL as their Web branding partners. "It's a pairing up of leaders that doesn't leave room for a No. 5 portal," says analyst Jordan Rohan of Wit SoundView. To turn things around, AltaVista this year is cutting marketing costs by 20% and putting more effort into selling its search engine technology to corporate customers.

Fortunately for Wetherell, he has the luxury of time for his new strategy to work. With roughly $2 billion in cash and marketable securities and a burn rate of around $50 million a month, CMGI could fund its business for at least three more years. And while Wetherell wants to prove to investors that his Internet operations are on the right track, he may still--assuming the Net once again regains investor favor--revert to the early-stage investment formula that worked so brilliantly. Another promising sign is that CMGI did not make many boneheaded investments. Among its 17 majority-owned businesses, roughly two-thirds are in companies that provide technology and services to other businesses. The outlook for the business-to-business sector is somewhat brighter than for the segment focused on selling to consumers. Recently, CMGI @Ventures has stepped up its investments in wireless startups, including Web application service providers 2Roam and Corrigo.

Wetherell still is counting on his network of companies to help pull each other out of difficulty. Many CMGI portfolio companies, for example, drive business to one another, and give each other price discounts and faster service. Plus, Wetherell has stressed that the young CEOs of startups benefit from access to seasoned industry executives at other CMGI companies. Over the next year, CMGI's disappointed investors will finally learn if CMGI's brand of togetherness really pays off on the Web.

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