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Strategic investments become gold mines

Several tech companies find that their strategic investments are reaping large unforeseen gains, as markets surge and investors throw money at young tech companies.

When PeopleSoft paid $8 million for a pre-IPO stake in Commerce One, the company was looking to foster stronger ties with a strategic partner.

But along the way, that strategic move has turned into a lucrative investment that would be the envy of most portfolio managers.

Shares in Commerce One, a business-to-business software provider, have soared 2,600 percent from their initial offering price of 21. The company is the best performing IPO of 1999, according to IPO.com. The company announced last week a 3-for-1 split of its shares, which are trading at about 600.

PeopleSoft is now sitting on an investment valued at $242.3 million--a sizable gain for a relatively modest $8 million strategy play.

PeopleSoft is not alone. A number of tech companies are finding that their strategic investments are reaping large unforeseen gains as the markets swell to new heights this year and investors are eager to throw money at Internet, Linux and infrastructure start-ups.

Chip giant Intel, for example, paid less than 86 cents a share for 3 million shares of Red Hat, according to the Linux company's prospectus. That initial investment of $2.59 million is now worth $685.7 million. Intel has also been an investor in other hot IPOs such as Ariba, VA Linux, Stamps.com and Proxicom.

Meanwhile, computer maker Apple has netted a lofty return on its investment in Akamai Technologies. Apple paid $12.5 million for 4.1 million shares in the Internet content delivery service. That investment is now valued at $1.15 billion based on Akamai's current price of about 281.

Representatives from these companies note that strategic alliances were the core reason for the investments. But they add that they've been extremely pleased with monetary rewards.

PeopleSoft and Apple note in their recent regulatory filings that their investments in Commerce One and Akamai, respectively, have been classified as "available-for-sale," meaning they have the flexibility to sell some of the shares in the near term.

PeopleSoft, which develops enterprise resource planning (ERP) software, has no immediate plans to sell its Commerce One shares, said Bill Cox, a PeopleSoft spokesman.

"We may want to later sell some of that stock and capture profits. When the markets are doing so well, it may be a good time to get some liquidity and keep our cash position strong."

He added that any proceeds from a sale would go into a general cash pool.

When the company made its Commerce One investment last June, PeopleSoft wanted to develop a strategic alliance to build an infrastructure for business-to-business transactions over the Internet.

"It's not like we made the investment thinking if it hits $500 a share, this investment would be a success," Cox said.

Robert Manetta, an Intel spokesman, said the chipmaker invests in companies that benefit the computing and Internet industries.

Intel, which has more than 300 companies in its investment portfolio, was holding stocks valued at $4.8 billion as of Sept. 30.

"We invest in companies when they are growing and that's usually when they are private and need the money most. But if they go public or that sector catches fire, they may not need our investment money then and it may make sense for Intel to take out some money and reinvest it elsewhere in emerging markets or young companies that help Intel with its strategic goal," Manetta said.

Intel, for example, sold a portion of its holdings in technology investment company CMGI last month. The chipmaker had planned to sell 200,000 shares of its approximately 4 million-share stake, which carried a value of $20.7 million.

Manetta noted that Intel may also choose to use the proceeds for general corporate purposes, rather than reinvestment.

"It's pretty fluid. Let's say we make a lot of money, we could use the proceeds to build a new [fabrication] plant, do an acquisition or stock buyback," he said.

But Manetta noted that Intel's investments are on track this year to surpass the $830 million invested in start-ups last year, indicating the company is interested in building up its investments.