Friday, August 29, 1997

CMG Information Services
(Nasdaq: CMGI)
Phone: 508-657-7000
Price (8/28/97): $22 1/2


A slew of savvy investments has paid off big for CMG Information Services' capital venture subsidiary. A meager investment in LYCOS (Nasdaq: LCOS) back in 1995 is worth close to $200 million today. A $750,000 stake in TeleT Communications purchased in April of 1996 was sold to PREMIERE TECHNOLOGIES (Nasdaq: PTEK) a few months later for cash and stock now valued at $10 million.

CMG's latest success story? Itself. Shares of CMG have more than doubled, fueled mostly by Web navigation company Lycos' meteoric rise in recent months.


The CMG in the company's moniker stands for College Marketing Group. The company started a dozen years ago selling a college mailing list database. It then expanded its mailing list offerings and added information processing services, including mutual fund prospectus fulfillment services.

Fittingly enough, CMG's fate turned a lucrative corner after a blockbuster investment. In February of 1994, the company developed a web browser under a newly formed BookLink subsidiary. With minimal investment in the product, CMG sold it to AMERICA ONLINE (NYSE: AOL) later that year, netting CMG pre-tax profits in excess of $70 million when it ultimately cashed out.

The Massachusetts-based company has parlayed the proceeds into building its @Ventures subsidiary. Through this subsidiary, CMG has acquired a majority stake in a dozen different Internet-related startup companies. Like Thermo Electron and Safeguard Scientific, CMG has become yet another publicly traded company that takes young companies under its wing, nurses them, and then materializes the gains.


Income Statement
12-month sales: $57.6 million
12-month income: ($25.6 million)
12-month EPS: ($2.69)
Profit Margin: N/A
Market Cap: $216 million

Balance Sheet
Cash: $61.7 million
Current Assets: $104.4 million
Current Liabilities: $49.4 million
Long-term Debt: $12.4 million

Price-to-earnings: N/A
Price-to-sales: 3.75


In December 1996, CMG sold its NetCarta web management tools business to MICROSOFT (Nasdaq: MSFT) for $20 million. Bill Gates's juggernaut also took a 5% stake in CMG, but investors were not impressed. Then the company announced a share buyback. Those who followed suit and picked up shares of CMG in the pre-teens were in for some nice gains.

When Internet bookseller AMAZON.COM (Nasdaq: AMZN) forged exclusive alliances with the two largest Internet search engines -- YAHOO (Nasdaq: YHOO) and EXCITE (Nasdaq: XCIT) -- the two search companies soared on the news, but Lycos lingered.

As the third largest search engine, Lycos was now also the largest player without ties to Bookseller BARNES & NOBLE (NYSE: BKS) had just launched its own Webstore to compete with, but had the experience, the market share, and the two largest search engines locked up in exclusive deals where any book references would link to the site. Lycos and Barnes & Noble were a logical partnership waiting to happen. In August the deal happened, and CMG has been riding Lycos' coattails ever since.


This summer CMG spun off 700,000 Lycos shares to its shareholders. Given the surging search engine's share price, that proved to be equivalent to a 10% stock dividend. That has eaten into CMG's original 8 million share stake in Lycos. Also, there are 927,000 shares in that sum that were pledged as stock options to Lycos executives for virtually nothing.

That still leaves CMG with 6.4 million shares of Lycos now valued at $200 million. The company also has $60 million in cash. The company's stake in Premiere Technolgies is good for another $10 million. Add it up and it's more than $27 for each share of CMG without considering the modest yet profitable mailing list division and its other dozen investments.

Another BookLink? Another $7 a share. Another NetCarta? Another two bucks. CMG has already proven it can do it. In the meantime, given the development phase of the companies in the @Ventures portfolio, the company is losing money. Yet cash has been replenished by sales, spin-offs, and public offerings of the ripened holdings.

While the company is obviously susceptible to a sharp fall in Lycos, that scenario has not necessarily proven to be the case in the past. Last September, when shares of Lycos bottomed out at $6 a share, CMG was trading at $15 3/4. The market had respect for CMG's portfolio then. With Lycos shares soaring five-fold since, is there any reason to doubt the savvy investors are still at work at CMG -- much less discount that prowess?

- Rick Aristotle Munarriz,

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