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Compaq, CMGi make AltaVista deal official

Compaq Computer Corp. will sell a majority stake in its AltaVista Internet division to CMGI Inc., finalizing a deal that has been rumored for several days.

The $2.3 billion stock swap calls for Compaq (NYSE: CPQ) to keep a 17 percent stake in the portal site.

Compaq will get 19 million shares of CMGI (Nasdaq: CMGI) common stock and preferred shares equal to another 1.8 million common shares, making it the largest outside shareholder of the company. Compaq will also get a seat on CMGI's board.

CMGI will also issue a $220 million, three-year note to Compaq.

The companies said today that Compaq will become a "premier IT partner" to CMGI, which owns stakes in several Internet companies, including rival portal site Lycos Inc.(Nasdaq: LCOS).

Analysts said they wouldn't rule out a future CMGI investment or acquisition in Lycos despite the AltaVista deal.

Compaq steps away

The partnership allows Compaq to focus on its struggling PC business while retaining some benefits from AltaVista's success.

In a conference call, Compaq chairman and acting CEO Ben Rosen said the deal allows the PC maker to have an Internet strategy without whole ownership of AltaVista. "It made much more sense to have a broad portfolio of Internet companies instead of just one," said Rosen.

"It's really a win-win for both sides," said Jill Frankle, an analyst at International Data Corp. in Framingham, Mass.

"Ultimately this is a good thing for Compaq," said Alex Cheung, portfolio manager of the Monument Internet Fund. "It would free up capital and tension in the company."

Louis Mazzucchelli, an analyst with Gerard Klauer Mattison, agreed that Compaq's move was good at least in the short-term. Mazzucchelli said Compaq will boost its bottom line by about a penny a share a quarter from its stake in AltaVista and its role as IT provider. Compaq will also benefit from CMGI's share appreciation.

But Mazzucchelli said this AltaVista deal could eventually haunt Compaq. "In the short-term it's a good deal because it allows Compaq to work on its core business," he said. "This is going to be one of those woulda, shoulda, coulda cases. If AltaVista doesn't do well, Compaq will look smart. If AltaVista does great, there will be questions."

Compaq had planned to spin off AltaVista as a public company, and the companies did not say yet whether those plans are still viable, although officials told analysts Monday that a spin off could still happen under new ownership.

CMGI: Portal in the making

For CMGI, the acquisition of AltaVista gives the company a chance to tie together a number of Internet properties into a cohesive unit. CMGI, which recently launched a unit to integrate its properties' sales efforts, appears to be moving to an operating business model that will offer real earnings and revenue instead of investment returns.

CMGI CEO David Wetherell said it can create a "new type of mega portal" that can address consumer, corporate and vertical markets. Wetherell said AltaVista could be hosted and enhanced with CMGI's subsidiaries ranging from iCast, an Internet broadcaster, Planet Direct and Navisite. Ads can also be targeted and sold through Adsmart and Engage Technologies, respectively. In addition, CMGI venture investments such as Raging Bull will play a role in AltaVista.

"With CMGI we can offer one-stop shopping," said Wetherell, who also plans to plug in e-commerce sites such as Furniture.com and Mothernature.com into AltaVista.

"It gives CMGI greater distribution one the Web for all its properties and services, and at the same time, it satisfies certain financial requirements that CMGI needed to do [so that it would not be considered a mutual fund]," said Frankle. "It hits a couple of things on the checklist for them."

CMGI was facing regulation as mutual fund because a big chunk of its assets derived from the company's numerous venture capital investments and stakes in other companies.

Under the Investment Company Act of 1940, companies that own investment securities with a value exceeding 40 percent of total assets, excluding cash items and government securities, are generally considered mutual funds. CMGI has often had more than 40 percent of its assets in investments and said in regulatory filings that it had until October to bring its investments below the mutual fund threshold. CMGI had two choices -- buy a company with real operating results or sell off some of its assets.

But Daniel King, an analyst at LaSalle St. Securities, said CMGI will remain an "Internet incubator" for the most part. "This shows they will be a more active participant in their investments," said King. "They will be more than a pile of investments."

King also said CMGI can use AltaVista to showcase properties such as Raging Bull and eventually have a network of properties to boost advertising and e-commerce revenue. "There is no CMGI network, but if CMGI could put all the traffic from its properties on one line it would be impressive."