Hasta La Vista to AltaVista?

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