Like so many Net companies,
Wayne, Pa., holding company
Internet Capital Group was a
high-flyer in 1999. Going public
that August at a split-adjusted
price of $6, ICG jumped in one day
to over $12, then climbed to $212
by late December.
But ICG, which now has stakes in 80
business-to-business Internet companies, has fallen
with the Net group this year, recently hovering around
its $6 IPO price. In mid-November it announced a 35 percent
staff cut. Some Wall Street analysts have downgraded
One of ICG's biggest boosters, Merrill Lynch analyst
Henry Blodget, turned on the company in a
mid-November report to investors, accusing it of a
"frenzied acquisition pace" that caused it to invest in
companies at excessive prices. ICG, he said, had
"bloated corporate overhead and a cash burn that
could only be sustained in the most bullish of markets."
ICG lost nearly $264 million in the third quarter, and its
chief source of new funds, IPOs for its partner
companies, has dried up. From the outside, things
don't look too good. But how do they seem from the
Beth Kaplan, an ICG managing director for operations,
told Wharton students Nov. 30 that ICG's future is not
as grim as it might appear. The company has recently
gone through an extensive restructuring, expects to
retain most of its portfolio of companies and should
rebound if market conditions improve so that some
holdings can be taken public, she said.
All 80 "partner" companies were evaluated this fall,
Kaplan said, and ranked according to their prospects.
Fifteen or 20 companies probably will get no more cash
from ICG, but those companies will continue to get other ICG services,
such as recruiting help. "We had to go to those
companies and have the honest conversation?.Hey,
you're a great company, but we're not going to fund
you anymore?.That was not fun," she says. ICG has
said it will concentrate its efforts on its 15 most
Kaplan joined ICG earlier this year after four years at
Rite Aid, where she most recently was senior executive
vice president for marketing and merchandising. From
1981 to 1996 she was at Procter & Gamble, spending
her final four years there as president of the Noxell
Division, the cosmetics and fragrance unit.
Heavy on B2B
All of ICG's companies are in business-to-business
Internet services, ranging from Agribuys, a California
firm that helps food companies obtain services, to
Farming Online, a British provider of agricultural
information, to Traffic.com, a Philadelphia company
that collects and sells highway traffic data. It was
founded in 1995 by Walter W. Buckley III, a former
vice president of acquisitions for Safeguard Scientifics,
and Kenneth A. Fox, formerly Safeguard's director of
West Coast operations.
A typical venture capital company invests in unrelated
start-ups, seeing each as a distinct investment that
may be "flipped," or sold, after it's taken public. But ICG
expects to remain active in most of its holdings for at
least 10 years, Kaplan said. In most cases, ICG has a
35 percent stake.
To create synergies between ICG companies, each, in
addition to cash, gets management and other
professional assistance from ICG. The companies are
also given special opportunities to do business with
one another, Kaplan told the students. The typical ICG
company is in a large, fragmented business with
opportunities to make large profit margins, she added.
Synergy is enhanced by nurturing holdings in three
areas. Vertical market makers are companies that
specialize in individual industries, such as consumer
products, health care or transportation. They are
companies that make money selling products or
services or by charging transaction fees. ICG helps
these companies use the Internet to streamline
procurement, reduce transaction costs, speed
distribution and automate customer support.
A second group, horizontal market makers, is
composed of companies that each serve a variety of
industries. Some of these companies serve customers'
human resources needs, aid them in acquiring used
equipment or sell excess inventory. The Internet can
be used to help these companies reach scattered
customers, Kaplan said. A third group, technology
infrastructure companies, provide customers in
wide-ranging industries with things like financial and
procurement services. These, too, can make
operations more efficient by using the Internet, Kaplan
ICG in the mix
ICG puts executives on its companies' boards and
advises on business strategies and day-to-day
operations. ICG also helps find executives for the
Kaplan told the students that soaring Internet stock
prices last year were bound to be followed by a
downturn, as the long-term strategy of a company like
ICG could not produce results quickly enough to justify
investors' inflated expectations. "These are still really,
really young companies," she said of ICG's partners.
"Building these companies is more of a journey than an
Nonetheless, she acknowledged that ICG has had to
revise its strategy. A year ago, the goal was to help
the partners grow as fast as possible on the theory
that profits would inevitably follow.
"Well, it didn't turn
out that way," she said. The downturn in technology
stocks has caused investors to focus much more
intensively on profits, or the prospect of profits, and
ICG is doing the same, she added.
Many young companies can choose when to become
profitable by controlling investment aimed at
expansion. "You have some very interesting,
stimulating conversations about when is it right to turn
profitable," she said. "You've got to have a high
degree, in this environment, of intellectual honesty."
One of the companies she oversees is Traffic.com,
which collects data from an expensive system of
towers along major highways. "That company's not
going to be profitable anytime soon, and it shouldn't
be," she said, noting that to dominate the market it
must make enormous capital expenditures and must
do it ahead of any competitors.
Straight talk on ICG
Managers of young companies tend to have boundless
enthusiasm, which is good, she noted. But one of ICG's
roles is to be "brutally honest about what you can and
Kaplan was brutally honest about ICG as well. If the
now-dormant market for Internet IPOs perks up, ICG
will be able to raise money in the public markets, which
it tried unsuccessfully to do last summer. She
predicted a tough first half in 2001, but she said the IPO
market may perk up in the second half.
"The company never should have had a $212 stock
price," she said in describing the bubble that carried
many technology stocks too high last year. She
predicted that ICG shares will go far above the current
$6 range but added: "Do I think it will be a $200 stock
in my near-term lifetime? No."
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