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December 4, 2000 |
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Struggling ICG Shifts Its Business Strategy
By Alorie Gilbert, with Jennifer Maselli
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ot all of Safeguard Scientifics Inc.'s investments have been golden. A 14% share of Internet Capital Group Inc. may turn out to be lead-footed.A holding company with stakes in 80 fledgling business-to-business E-commerce firms, ICG was flying high a year ago when its stock reached $212 a share, but the company has fallen on hard times. In November, ICG reported a third-quarter loss of $263.9 million, compared with a loss of $15.3 million the same quarter a year ago. The company said it will lay off 35% of its staff, about 50 people, and shut down an office. Following the earnings report, ICG stock fell to a 52-week low of $6 a share.
ICG is shifting its business strategy. Its initial vision was to build a broad network of E-marketplace companies and E-commerce infrastructure companies that share knowledge, skills, operational experience, and market intelligence. But even the collective experience of 80 startups hasn't been enough for any one of them to create profits or go public since March. With capital markets tightening, ICG will focus its attention on 15 private ventures that it believes are most likely to create near-term value for ICG investors. Though analysts deem the strategy sound, it diminishes ICG's original vision. "ICG won't have as much power over its companies because its network won't be as broad," says Jon Ekoniak, an analyst at U.S. Bancorp Piper Jaffray.
Among the 15 ventures ICG believes can break through to the public markets fastest are Agribuys, AssetTrade.com, USgift.com, and Logistics.com, all online marketplaces. It's also betting on E-commerce software and services providers eCredit, ICG Commerce, Net Vendor, and Rightworks. ICG has invested $1.7 billion in the 15 companies, for an average 37% equity stake. The companies have collectively generated $44 million in revenue in the third quarter, up 33% from the previous quarter.
The 45 ICG holdings that are not already public or are based abroad fall into a category that ICG calls emerging companies. They include Citadon, Commerx, e-Chemicals, Emptoris, FuelSpot, MetalSite, and Syncra Systems, and ICG will consider funding them on a case by case basis. Commerx, operator of PlasticsNet, says it's still receiving ample support from ICG. With a 38% share of Commerx, ICG was one of the lead investors in a $18.8 million round of venture funding that closed in October. "It's pretty much business as usual and then some," a Commerx spokeswoman says. "ICG has been more involved than ever."
What does this mean for Safeguard? According to Dan Renouard, VP of research for Robert W. Baird & Co., approximately one-third of the value of Safeguard's public portfolio comes from its 14% stake in Internet Capital Group. Safeguard's stock, Renouard points out, has fallen parallel with ICG's, depreciating approximately 84% during the last eight months. Still, Safeguard's portfolio is diversified enough, with sufficient private investments that its stock should recover no matter what happens to ICG.
Analysts are concerned about ICG's financial position. The company reported it had $513.9 million in cash and short-term investments as of Sept. 30. But Piper Jaffray's Ekoniak says ICG's partner companies have burned through a quarter of their cash and will have to tap private or public markets for more
funding before they become profitable. "Those markets are still tight," Ekoniak says. "Even their favorite companies may not receive additional funding, and ICG doesn't have the cash to do all the funding itself."
Illustration by Jamie Hogan
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