The point is, let the stock price five years from now do the talking. Only then will opinions expressed in this Duel be validated or disproved. Just to reaffirm -- I do not care if the stock goes up tomorrow or next week. Those movements are irrelevant to my argument, as the wild price action over the last five months has demonstrated. If you are looking for guidance on the short-term movement of the stock, you have come to the wrong place. I was no more wrong in December than I am right now that ICG is valued at half of where it was in November.
OK?
For the layman, ICG is an incubator company focusing on those sectors of business-to-business commerce that can be made more efficient by the Internet. The company has identified what it considers to be the 50 most lucrative target markets, and invests in and assists in the development of start-up or early stage companies attempting to address those markets. Thus far, ICG figures it has hit 35 of the 50 with its current set of partner companies. There are two ways they address the markets: by being a market maker (a company that matches buyers and sellers) or an enabler (companies that sell software or services to take advantage of the Internet). The great thing about the ICG methodology is that they can cross-pollinate among partner companies, so when one has a requirement the other can fill, they both benefit.
First, let's look at the claim that Internet Capital Group is B2B. This made sense before the waves of B2B companies came public, but not anymore. Now there are others with designs on the throne, including CMGI <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMGI)") else Response.Write("(Nasdaq: CMGI)") end if %> and Softbank (OTC: SFTBF), which have enormous competitive arms in B2B, even though their core competencies lie elsewhere in the e-commerce markets. Both have significantly higher market caps than ICG at this time, but more damning is the fact that two other B2B competitors, Ariba <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ARBA)") else Response.Write("(Nasdaq: ARBA)") end if %> and Commerce One <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMRC)") else Response.Write("(Nasdaq: CMRC)") end if %>, have approached or surpassed ICG's market cap as well. I can't have it both ways and argue that when ICG's market cap is high it's froth, but when others are high it's justified, but given the drop in the prices of many speculative companies, it is notable that ICG has been punished much more heavily than others sitting in its space.
ICG's revenues are primarily derived when one of its partner companies goes public. For 1999, ICG had $16 million in operating revenues (the majority of which consists of ICG's portion of consolidated revenues of any partner company of which it holds more than 50%), and an operating loss of $40 million (ditto). But it also had a non-operating gain (read: proceeds from sale of assets) of $67 million. Most proponents of ICG will tell you that the company's story is not really as a revenue model, but rather one of assets. ICG's publicly traded assets are currently valued at just over $2 billion, with its privately held assets and approximately $1 billion in cash presumably providing the value for the remainder of ICG's $10.8 billion market cap.
So ICG has no recurring revenues, nor as a holding company should investors expect it to. Therefore, its partner companies, the assets upon which its valuation is granted, must be the leaders in their fields, first movers with high barriers to entry. But in fact, we read from the ICG 10-K:
"Competition for Internet products and services is intense. As the market for B2B e-commerce grows, we expect that competition will intensify. Barriers to entry are minimal, and competitors can offer products and services at a relatively low cost."
To be fair, if investors were to depend solely upon the risk statements of any company to determine its appropriateness for our money, we would never put a dime on the market. But this type of language should serve as a severe warning to those who think that ICG is a sure thing. It begs the question: How is ICG sustainable? If it has already addressed the majority of the markets, and it cannot monetize its holdings except by selling them, is ICG itself not at grave risk of having to invest more and more money for ever poorer potential returns?
Since ICG is only designed to take companies public, the only way it can realize revenues from its holdings is to either sell additional pieces of them, or to find new places to invest. Currently, venture capital companies are throwing money at any company with the appellation of "B2B" attached. What's worse, several of the "old economy" companies whose markets ICG is supposed to address are setting up their own Internet marketplaces. Fact is, the surge in market capitalization enjoyed by ICG will prove to make it much more difficult and expensive for ICG to pick up additional companies as cheaply as it has in the past.
For the non-consolidated remainder of ICG's partner companies, its portion of their profits for 1999 came out to negative $92 million. Again, not surprising; they're start-ups, after all. But we have already determined that many of these companies are in markets with low barriers to entry, and additional business-to-business players are beating down the doors to set up their own solutions. In scenarios where the major competitive advantage could be price, this is not a great story for high-margin sales.
And what of these markets? Wild estimates range from $1.1 trillion in 2003 (the GDP of France) to $7.7 trillion in 2004 (two-thirds of the GDP of the United States), up from less than $100 billion worldwide this year. Already we see some big players stepping in to run their own Internet marketplaces -- Enron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ENE)") else Response.Write("(NYSE: ENE)") end if %> and Williams Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WCG)") else Response.Write("(NYSE: WCG)") end if %> in energy and communications, Ford <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> in auto parts, to name a few. Campaigns such as these are the true bane of ICG and other B2B enablers. Why would the big boys give up so much potential revenue as the boffo numbers listed above to ICG partner companies and other B2B start-ups when a dedicated, self-driven campaign will keep the revenues in-house? I'd cast doubt on the potential size of the overall market, but for sake of discussion let's just say it's as big as some analysts believe it will be. The competition, by ICG's own admission, is going to be huge, and the differentiation from a service provider perspective will be slight. There will not be multiple survivors in each segment, and no new company has managed to dig an eBay-style market-dominating moat around itself that an existing big boy could not cross with a focused, technology-driven effort of its own.
ICG has been described in the press alternately as a "proxy B2B play" and a "collection of lottery tickets." The former argument assumes that there is insufficient competition in the markets ICG's partners are trying to address, the latter that one or more ICG-incubated companies is going to pay off. In both cases, it is too soon to predict the end result with any accuracy. But the enormous amounts of money that investors threw at ICG in the last half of 1999 means one thing for sure: ICG has completely lost the element of surprise.
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