Thursday, June 24, 1999
DJIA 10562.38 -104.48 (-0.98%) S&P 500 1317.44 -15.62 (-1.17%) Nasdaq 2567.80 -30.32 (-1.17%) Russell 2000 444.92 -2.12 (-0.47%) 30-Year Bond 87 20/32 -8/32 6.16 Yield

An Investment Opinion
by Louis Corrigan

CMGI Looks to Bulk Up

CMGI Inc. (Nasdaq: CMGI), an incubator of Internet companies and a darling of online traders, today confirmed what's been rumored the last couple of days: It's talking to Compaq (NYSE: CPQ) about acquiring a controlling stake in the troubled computer maker's Web properties, including Alta Vista, a leading search engine and major Internet destination site. At the same time, CMGI is interested in acquiring the roughly 82% of Internet portal Lycos (Nasdaq: LCOS) that it does not already own. Either deal could raise CMGI's high Internet profile by making it more of an operating company. Thus far, it's been run more like a venture capital firm, funding start-ups, fostering their growth, and then taking them public.

Media Metrix (Nasdaq: MMXI) ranks Alta Vista among its top 10 most trafficked websites, with a 14.5% audience reach in May, good for about 9.5 million distinct visitors. While that's less than a third of Lycos' reach, it's still substantial, ahead of the NBC venture Snap.com. The problem is that Compaq picked up Alta Vista when it purchased Digital Equipment last year, then basically forgot about it.

Meanwhile, Yahoo! (Nasdaq: YHOO) and other search engines continued to expand their content offerings, taking what had been mere search engines or directories and turning them into Web portals. Only late last year did Compaq start making peculiar moves to beef up its Alta Vista offering (such as its high-priced acquisition of shopping.com, an e-tailer with a dubious history). Talk that Compaq would spin off these Web properties pushed the computer maker's shares to an unwarranted height.

A deal on the Alta Vista front seems possible, though it may look different from the $2-$3 billion purchase initially reported. With rivals like Dell (Nasdaq: DELL) and Gateway (NYSE: GTW) building up their own online stores and Internet service offerings to cash in on their excellent relationships with customers, Compaq can ill afford to simply drop its online initiatives. At the same time, though, the company has shown no skill at managing them. Finding someone with Web expertise to carry the ball would be a smart move for the bloated Compaq, which needs to focus on carving out a real core business from its multiple acquisitions in recent years.

For its part, CMGI could use Alta Vista's popularity to grow its less established businesses while also enhancing Alta Vista's content and service offerings. That's a must if Alta Vista expects to have a chance of competing with the few major networks now consolidating mainstream Web traffic. CMGI is also looking to boost its operating assets to avoid being regulated as a mutual fund, which would entail onerous tax consequences. Currently, about 71% of CMGI's total assets are in the form of investment securities. It needs to trim that figure below 40% by the end of October. In the past, CMGI has squirmed out of this bind by selling shares in its publicly traded companies, such as Lycos. But acquiring a majority stake in Compaq's Internet properties would solve that problem and in a better fashion.

Though a revamped CMGI focused on running a consolidated network of Web companies would benefit from Lycos, such a deal won't come cheap. As the Wall Street Journal reported today, talks between CMGI's Chair/CEO David Wetherell and Lycos' Chair/CEO Bob Davis haven't gotten very far. As a Lycos board member, Wetherell had initially signed off on the complex deal for Barry Diller's USA Networks (Nasdaq: USAI) to acquire Lycos in an arrangement merging online and offline assets. When Lycos shares fell on the news, Wetherell dropped his support and eventually resigned from the board. Those moves basically scuttled the pact since CMGI controls such a huge stake in Lycos.

Naturally, Davis still feels like Wetherell betrayed him, and it seems highly unlikely Davis would stay around if CMGI acquired Lycos. Moreover, it's not likely Davis will approve any deal that doesn't assure Lycos shareowners an obvious premium to the $127 per share price Lycos brought before the USA deal was announced. Given that Davis seems to think CMGI's shares are overvalued, he won't easily accept them as currency.


Tektronix Inc. (NYSE: TEK) gained $2 to $28 9/16 after posting fiscal Q4 EPS of $0.53, down from last year's $0.83 but in line with the Zacks mean estimate. The company also said it will split its business into two separate publicly traded companies. One company, which will keep the Tektronix name, will include the firm's telecom and TV test and measurement equipment business, while the other unnamed company will consist of the firm's color printing and imaging business. Tektronix added that it intends to sell off or find a strategic alliance for its video and networking business.

East Coast wireless telecommunications firm Omnipoint Corp. (Nasdaq: OMPT) jumped $8 1/2 to $29 5/16 after agreeing to be acquired by West Coast wireless firm VoiceStream Wireless Corp. (Nasdaq: VSTR) for roughly $24.34 per share in stock and $8 per share in cash. VoiceStream shareholder Hutchison Telecommunications Ltd. has agreed to make a $957 million cash investment in the combined entity. VoiceStream fell $1/2 to $29.

Information technology support services provider Data Processing Resources (Nasdaq: DPRC) soared $10 15/16 to $23 3/16 after enterprise system implementation services firm Compuware (Nasdaq: CPWR) agreed to buy the company in a cash tender offer for $24 per share, a 96% premium to its closing price of $12 1/4 per share yesterday.

Online bill payment services firm CheckFree (Nasdaq: CKFR) regained $1 3/4 to $30 1/2 after tumbling 24% yesterday on fears that a plan by three major U.S. banks to form an electronic bill routing system would hurt its business. The company said the market "grossly overreacted" to the news and today cancelled a planned 3.8 million follow-on stock offering because of the drop. Deutsche Banc Alex. Brown also upgraded the firm this morning to "strong buy" from "buy."

Atlanta-based Internet services provider (ISP) MindSpring Enterprises (Nasdaq: MSPG) trampolined $4 13/16 higher to $83 7/16 after saying it is "in discussions regarding possible business combinations." The firm added that it will not say anything further about the talks unless they result in a definitive agreement.

Personal communications services (PCS) provider Aerial Communications (Nasdaq: AERL) picked up $1 11/16 to $12 7/16 following an ABN Amro upgrade to "buy" from "outperform." The investment firm set a 12-month price target of $18 per share.

Software and multimedia products and services provider Zomax Inc. (Nasdaq: ZOMX) zoomed $1 3/4 higher to $12 1/2 after saying improved operating margins at its recently acquired Kao Infosystems business, higher capacity utilization rates, and an improved customer mix will lead to Q2 EPS of about $0.55, "significantly" exceeding the First Call mean estimate of $0.31.

Specialty water treatment chemicals provider Nalco Chemical Co. (NYSE: NLC) cleaned up with a $2 3/4 gain to $40 on speculation that it may be an acquisition target. Bloomberg News fingered oil refiner and specialty chemical firm Ashland (NYSE: ASH) and French water company Vivendi as two possible buyers.

The American depositary shares of Japanese electronics firm Hitachi Ltd. (NYSE: HIT) moved up $4 to $89 1/4 after Merrill Lynch raised its near-term rating on the company to "accumulate" from "neutral."


Publishing giant Gannett Co. (NYSE: GCI) announced it will acquire Newsquest Plc of the U.K. for about 922 million pounds, or $1.5 billion in U.S. dollars, in cash plus assumption of debt. Newsquest is the largest publisher of regional newspapers in England and the third largest in the U.K. The company's stock retreated $1 11/16 to $71 3/4 this morning.

Micron Technology (NYSE: MU), which reported a fiscal Q3 loss of $0.10 a share versus a loss of $0.51 last year, slipped $2 1/4 to $41 11/16. Analysts had expected the company to break even this quarter. Micron blamed pricing pressures for semiconductors as well as all of its PC product lines.

Shares of chip maker Advanced Micro Devices (NYSE: AMD) retreated this morning, losing $1 5/16 to $16 7/8 on the company's warning late yesterday that it will report a second-quarter operating loss of around $200 million with revenues falling short of $600 million. That means a loss per share of $1.36, more than three times worse than analysts' mean estimate of a loss of $0.40 a share. For more on this development, head back to this morning's Breakfast With the Fool.

Digital smart card interfaces developer SCM Microsystems (Nasdaq: SCMM) slid $9 to $45 3/8 on last night's news that the company expects Q2 EPS of between $0.10 and $0.13 before charges, missing First Call's three-analyst $0.24 consensus projection. After charges -- which include costs associated with the acquisition of a majority stake in digital video company Dazzle Multimedia -- the company expects to post a loss.

Telecommunications services company CT Communications (Nasdaq: CTCI) retreated $5 1/4 to $38 1/2 after pricing a 1.1 million-share secondary offering at $38 per share, a 13% discount to last night's closing price. All of the shares are being offered by stockholders, so the company won't receive any proceeds.

Vending machine currency acceptance technologies firm Global Payment Technologies (Nasdaq: GPTX) paid out $2 1/8 to $8 5/8 on news that the company expects full-year EPS to be about 15% better than last year's $0.52 mark but below company objectives. "The slowdown in the Australian gaming market, which is expected to be temporary, has caused an overstocking of product at our Australian affiliate," said Chairman and CEO Stephen Katz.

NTL Inc. (Nasdaq: NTLI), a U.S.-based company that provides telecom and cable service in the U.K., hung up $5 1/16 to $85 3/4 after last night saying it filed to sell 8 million shares of common stock and $400 million of NTL Communications Corp. convertible subordinated notes due 2009, which are convertible into NTL common stock.

High-speed data transmission chip developer Globespan Semiconductor (Nasdaq: GSPN) moved back $7 1/8 to $35 3/16 in the company's second day of trading. The stock raced up to $42 5/16 yesterday, a nifty 182%, after the company sold 3.25 million shares to the public at $15 each.

Online business-to-business procurement management systems firm Ariba Inc. (Nasdaq: ARBA) cooled off $8 1/2 to $81 1/2 after snagging $67 yesterday as the company sold 5 million shares in an IPO at $23 apiece.

Vacation planner and tour package marketer Global Vacation Group (NYSE: GVG) gave up $2 to $4 after the company said it won't meet analysts' Q2 and full-year earnings expectations. Global said to expect Q2 EPS of between $0.02 and $0.04, well off First Call's $0.17 consensus estimate provided by a four-analyst panel. Many of the difficulties are rearing up at the company's Globetrotters "popularly priced" division.

Telecommunications access products designer Premisys Communications (Nasdaq: PRMS) lost $1 15/32 to $6 29/32 after Goldman, Sachs & Co. downgraded the stock to "market perform" from "market outperform."


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