Investment bank Merrill Lynch (ML) has praised Compaq Computer Corp’s deal with CMGI Inc over its web search engine AltaVista. We believe selling AltaVista makes sense because it was suffocating inside Compaq, writes VP Steve Milunovich. The laundry list of content and service partnerships that CMGI’s internet portfolio companies offer to the AltaVista mega-portal is compelling in our view.
ML believes the $2.7bn price tag placed on AltaVista – an estimated 14 times revenue – is reasonable, despite the fact that CMGI paid 20 times revenue for its stake in rival search engine Lycos Inc. Due to its higher commerce content, ML estimates AltaVista’s long term operating margins at 12%, compared to 25% for Lycos. There is execution risk in this deal, Milunovich acknowledges, but we think the chances of AltaVista’s survival have increased as a result of the new ownership. An initial public offering of shares in AltaVista is still on the drawing board, but ML doubts that such a float will take place before September or October.
Other analysts are less sanguine about the partnership between Compaq and CMGI. In particular, they point to the ongoing problems surrounding Compaq’s acquisition of Digital Equipment Corp (DEC). Since buying DEC, Compaq has seen both its profits and its stock prices fall. On April 19 1999, the company asked for and received the resignation of its long-serving chief executive officer Eckhard Pfeiffer. Some welcomed the change but others point out that Compaq’s real problem is not its management so much as a production and distribution system that struggles to keep pace with the nimbler direct-sales superstars, Dell Computer Corp and Gateway Inc.
Seen in that context, selling AltaVista could be a sound strategic move, relieving Compaq of the burden of running a non- core business and allowing it to refocus on hardware. In effect, the PC giant hands off the risk of AltaVista to the more expert CMGI, while retaining a sizeable stake in CMGI for investment purposes. That’s encouraging, but while chairman Ben Rosen and his management team continue to search for a new CEO, not even ML’s Milunovich is bullish on Compaq itself. We continue to be neutral on shares of Compaq, given the low visibility regarding management and strategy, he concludes.
