Hasta La Vista to AltaVista?

Baldwin Louie — Fri, 06 Apr 2001 15:00:00 -0700

Search engine and portal group AltaVista (dossier) is being tipped as the next big online business to be put up for sale. Its parent, CMGI (CMGI), was once a leading Internet investment company, but is now attempting to drag itself out of a financial hole. Speculation is rife among company insiders and investment bankers that CMGI is ready to accept an offer for AltaVista or a cash injection from a strategic partner.

CMGI could certainly use the cash. Its Nasdaq-listed stock has dropped in value by 98 percent since the start of last year, and analysts are questioning whether the business can reach break-even before it runs out of funds. AltaVista is also looking for a handout - the downturn in online advertising spending has pushed profitability well beyond next year, and the group is changing its business model to concentrate more on the corporate market for search engines.

"AltaVista does seem to be on the block," one CMGI source said. "They would be very happy if a bid was to emerge - or anyone [came along] offering cash." CMGI, a bellwether of the business-to-consumer market, is already re-evaluating its portfolio of majority-owned concerns. Having laid off 25 percent of its workforce, the company wants to reduce its stable of controlled companies from the current 12 to about five. Bids are already being sought for Internet broadcasting business Activate and digital marketing company AdForce (dossier). They were joined last month by publicly quoted NaviSite (NAVI). CMGI has appointed Goldman Sachs to review future prospects for the Web hosting business, in which it has a majority stake, after NaviSite received a number of takeover approaches.

However, CMGI's communications director, John Stevens, dismissed talk of an imminent sale of AltaVista, saying: "We are committed to expanding corporate and distribution partnerships for companies such as AltaVista in order to build relationships that will lead to secure, recurring revenue streams." An AltaVista spokesman characterized talk of a sale as "speculative rumor" adding: "CMGI has on numerous occasions - most recently during its quarterly update - expressed its commitment to AltaVista."

But in order to hit its cash-burn targets, CMGI must carve out several more of its businesses. Last month's second-quarter results showed the group has about $900 million in the bank. That might sound a lot, but CMGI went through $185 million in that quarter. The company reckons it will have $500 million left at the end of this fiscal year.

CMGI plans to augment its funds by selling stock in those of its portfolio companies that managed to launch IPOs, such as the digital-marketing group Engage (ENGA). However, this assumes there will be a market appetite for shares in some of CMGI's bombed-out dot-coms over the coming months. On current analysts' projections, if CMGI cannot sell some of its publicly traded stocks, it will struggle to get through 2002. And it does not look like it will break even anytime soon.

Revenues are slowing because of the downturn in the online advertising market, which underpins several of CMGI's core holdings. The group made a loss in the second quarter of $2.6 billion. After taking account of a $2 billion writedown of the value of some of the group's assets because of the collapse in technology stocks, the underlying loss was $216 million - just a few million less than the first quarter.

Revenues were $343 million, compared with $366 million in the previous quarter. CMGI warned that revenues would drop further - to between $280 million and $290 million - in the third quarter.

While the advertising slowdown has caused AltaVista's revenues to drop quarter on quarter so far this year, it is the company's sophisticated search technology - which has garnered 39 patents, more than any other search engine - that is seen as the key to its future. And the worry now is that AltaVista will be unable to exploit this technology because of CMGI's cash constraints.

"The question is, does CMGI have the cash and resources to make use of that technology?" said one banker. "AltaVista has all these patents, and when you think about how a search engine can be integrated into a business-to-business product such as supply-chain management, there is a compelling product to be produced."

This has led some in the market to believe that CMGI would be willing to accept a dilution of its stake in AltaVista in return for a cash investment that would speed the group's path to profitability and the exploitation of its technology.

One source said senior CMGI executives had told him recently that a strategic partner for AltaVista would be very welcome.

Anthony Lorenzo, an analyst at Credit Suisse First Boston (dossier), said he would not be surprised if AltaVista becomes the next CMGI company under the gavel. "CMGI has said that they are going to look at any opportunities that are out there for them among their businesses in order to get some cash. It is a good search engine and there are probably a lot of opportunities for it."

One thing is certain: If AltaVista does go up for sale, CMGI will not get anything like the $2.3 billion it paid Compaq Computer (CPQ) for the business in June 1999.

AltaVista's Tale of Woe

AltaVista - meaning "the view from above" - is a plagued company. Former employees joke that it's cursed. The firm has the distinction of having had IPO plans shelved on three occasions, each time by a different parent.

April 1995 - AltaVista is conceived by Digital Equipment Corp. engineers. The idea was to develop a software "spider" to crawl the Web, indexing and presenting the information it found.

December 1995 - AltaVista launches at www.digital.altavista.com - a move that will turn out to be an expensive blunder.

1996 - AltaVista wins the contract to power searches on Yahoo (YHOO). Also hires DoubleClick (DCLK) to sell ads on its site, which becomes a top 10 Web destination.

1997 - Digital begins to think about an IPO, but plans are aborted.

1998 - Compaq buys Digital. The rumor is that Digital's Web-averse management literally gave AltaVista away, valuing it at nothing.

1999 - Compaq announces it is taking AltaVista public. First, though, it must buy the Altavista.com domain name - at a record price: $3.3 million. The IPO is shelved and instead AltaVista is sold to CMGI.

January 2000 - CMGI share price peaks at over $165, valuing the group at over $50 billion. It has since sunk to $3, valuing the group at under $1 billion.

April 2000 - CMGI puts off any thoughts of an AltaVista IPO.

Summer 2000 - AltaVista scraps plan to float its European subsidiary after admitting that a planned flat-fee Internet service in the U.K. was never viable. U.K. head Andy Mitchell departs.

October 2000 - AltaVista chief executive Rod Schrock quits, and CMGI announces job cuts.

January 2001 - AltaVista's IPO is pulled for the third time, with CMGI blaming market conditions. It also announces a third round of job cuts.

The Industry Standard - Hasta La Vista to AltaVista? - Comments

Hasta La Vista to AltaVista?