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THE DAY AHEAD: How AltaVista will transform CMGI

The CMGI investors bought into just a few weeks ago could become vastly different following the company's acquisition of 83 percent of AltaVista from Compaq Computer. The changes aren't apparent right now, but they should be evident in upcoming quarters.

Don't worry, CMGI (Nasdaq: CMGI, chart) is still the hard-to-understand "Internet incubator" that makes bundles of cash off of its savvy investments. But now there's a new element that could transform CMGI into a media player.

CMGI and AltaVista: Perfect together?

Meet CMGI, the media company. CMGI, with the purchase of a controlling stake in Compaq's AltaVista, could look a lot more like Yahoo! Inc. (Nasdaq: YHOO) and Excite At Home (Nasdaq: ATHM). In some regards (earnings), CMGI will be easier to understand for investors. But in other areas (investments vs. competition), CMGI will throw investors a few new wrinkles.

The CMGI evolution is difficult to chart. CMGI essentially built up all the parts of a portal without actually owning one. Now it has AltaVista as the engine.

Here are some of the changes to look for now CMGI has AltaVista in the fold.

1. Earnings and revenue could matter. Earnings usually don't matter for Internet companies and that fact was just magnified by CMGI, which had quarters only as good as the last stock sale. When CMGI recently missed estimates and took a hit, it was simply silly. Earnings are irrelevant to CMGI, which operates almost like a mutual fund. Return on investment was everything.

However, CMGI could now become a revenue story. CMGI CEO David Wetherell wouldn't give specific guidance on revenue with AltaVista in the loop, but it was clear there would be a lot more sales than before. With AltaVista, analysts expect CMGI's annual revenue to double to about $320 million and keep growing. Investors will also want to see CMGI's page view and reach statistics.

2. CMGI, which owns a nice chunk of Lycos Inc. (Nasdaq: LCOS), could run into conflicts with its investments. Look no farther than Lycos for an example. CMGI buys AltaVista and winds up potentially competing with its own investment. Lycos is already annoyed with CMGI for breaking up its merger with USA Networks (Nasdaq: USAI).

Wetherell skirted the Lycos issue. "Lycos is a very strongly positioned company with tremendous assets of its own. We think this is additive to our business model, and does not subtract from Lycos," he said. And Lycos isn't the only investment that CMGI will compete with now. CMGI has stakes in (Nasdaq: AMZN) and Yahoo! (Nasdaq: YHOO) too and is likely to bump heads with both Internet titans.

3. CMGI might be viewed as a Compaq crony. As PC vendors evolve into being serious Net players, Compaq's stake in CMGI could become an issue. Gateway Inc. (NYSE: GTW) and Dell Computer Corp. (Nasdaq: DELL) have strategic partnerships with CMGI, but now have to deal with Compaq as a "premier IT partner." Will Gateway want its $200 million investment back now?

4. The media business is a different ballgame. CMGI will have to spend more on marketing AltaVista and all of its properties to make its "megaportal" a Yahoo killer.

AltaVista, which has had only $1 million in marketing spending so far this year, will finally get major marketing dollars. Compaq and CMGI have agreed to commit $100 million this year to a joint branding and marketing fund for the Internet organizations. Wetherell left himself an escape hatch by saying it could launch an AltaVista IPO at any time, but CMGI is also spending $50 million on marketing and plans to "leverage up" its content with AltaVista.

CMGI will also go toe-to-toe with Excite At Home, which can match CMGI's Engage Technologies' user profiles with its MatchLogic unit. AltaVista's expenses now become CMGI's.

5. The talk of CMGI as being a mutual fund can die.

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. Analysts guess that CMGI is OK with the Securities and Exchange Commission since AltaVista will boost operating results.

Overall, CMGI's acquisition of AltaVista is a great move. CMGI can check off a lot of its goals in one shot. It now has a means to leverage its venture investments and subsidiaries. CMGI could become a synergy case study, but the dynamics behind CMGI could change.