2HRS2GO: Pressure builds on ICG

Everyone's trying to anticipate everything these days.

Of course, that's what Wall Street analysts get paid to do in the first place, so it shouldn't be too surprising that at least one investment bank upgraded Internet Capital Group (Nasdaq: ICGE) a couple of days ahead of the company's first-ever analyst meeting.

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Robertson Stephens analyst Eric Upin raised ICG to "strong buy" from a "buy" rating and set a 12- to 18-month price target of $250 per share. The immediate result: ICGE's value shot up by nearly a third this morning before settling a bit to a "mere" 25 percent gain for the session.

Some folks ridicule ICG's portfolio as a group of companies no one should care about. It is hard to be interested in niches like equipment and materials for industries like plastics, agricultural or construction.

Fans of ICG point out those are huge markets mostly untapped online. "It should be about how much these private companies are worth in the future, not how much they're worth today," Upin said in a phone interview this morning.

As for competition from the traditional commerce enablers in those industries, Upin sees little to fear. Older distributors can't compete with an ICG when it comes to attracting the talent needed to build online businesses because ICG offers the lure of IPOs and options that would stem from them, Upin argues. At the same time, ICG has hired managers with strong backgrounds, the analyst says.

Internet incubators such as ICG are also more involved with their investments, offering logistical support and pushing their companies faster, which theoretically gives them an even bigger edge. "It's winner take most," Upin said. "ICG is an active participant in helping these companies grow as quickly as possible, which is the name of the game on the Internet."

Today's move might be the second Robby Stephens jolt in a week for ICG, an Internet investment firm specializing in business-to-business commerce online. Enthusiasm about B2B bubbled throughout last week's Robby Stephens conference in San Francisco, and that may have spilled over into the ranks of Internet incubators; ICG, CMGi (Nasdaq: CMGI) and Safeguard Scientifics (NYSE: SFE) each started rising last Monday.

But ICG was coming off an especially steep dip, largely caused by worries over expirations of the company's IPO lock-ups. Those deadlines passed with a relatively small amount of selling, so Upin believes much of the uncertainty has been cleared up. "We've hit the wall, we've hit the bottom on fears of the lock-up," Upin said.

That frees the market to focus on the value inherent in ICG's stakes in 52 private companies, Upin believes. There's no concrete way of valuing those holdings, but the Robertson Stephens analyst cited ICG's five public holdings as a precedent.

ICG owns large portions of VerticalNet (Nasdaq: VERT); eMerge Interactive (Nasdaq: EMRG); Breakaway Solutions (Nasdaq: BWAY) Onvia.com (Nasdaq: ONVI); and US Interactive (Nasdaq: USIT). Those publicly-traded companies had a combined market cap of $16 billion at the end of last week. ICG's aggregate holdings carried roughly a $5 billion value.

Obviously, applying those kinds of valuations to ICG's non-public assets yields a huge number. "We're talking about a staggering amount of market cap being created in this name," Upin said.

The logic fits, but that doesn't mean the argument is infallible. A $250 price for ICG relies on the market to continue valuing B2B at an unearthly premium, which is no guarantee. Certainly it seems a bit of a stretch to say ICG's companies all deserve premium consideration -- a food industry specialist like Internet Commerce Systems is hardly comparable to a VerticalNet or even eMerge.

And as more B2B companies go public, the market's appetite becomes more sated. Business-to-business IPOs are coming almost every week, and being devoured as rapaciously as online consumer firms were a year ago.

You also have to wonder how much of the recent ICG run-up was aggravated by short covering. Upin talks about market cap, but here's another "staggering" figure for you: nearly 61 percent of ICGE's float was being shorted a month ago. Granted, quite a bit of that may have disappeared in recent weeks as lock-ups ran down; nevertheless, the sheer amount of buying needed to take care of that short borrowing would have produced a decent pop by itself.

Now ICG has gone from being a B2B beneficiary to a perceived leader, at least for the moment. And with IPO issues receding into the past, the company has no more margin for mistakes -- only perfection will do. Good luck. 22GO>