Gains Seen for Both Sides in AltaVista Deal
Compaq Computer’s $2.3-billion sale of 83% of its AltaVista Internet search engine to CMGI Inc. on Tuesday allows the struggling computer maker to shed a distracting and money-losing unit and concentrate on its core PC and server businesses.
The sale would allow acting Chief Executive Ben Rosen to focus on finding a new CEO and help Compaq reshape itself as a one-stop hardware and software vendor to businesses.
“It makes sense for Compaq to make such a move, because management doesn’t have the bandwidth to give AltaVista the proper attention,” said Hambrecht & Quist analyst Walter Winnitzki. “They have some bigger issues they have to solve.”
Houston-based Compaq, the world’s largest maker of personal computers, would keep the rest of AltaVista and become the largest outside shareholder in CMGI, which has a variety of Internet holdings in various stages of development. The deal requires shareholder and regulatory approval.
In a conference call with securities analysts and journalists Tuesday, Rosen maintained that the move will not hurt Compaq’s quest to become a leading provider of Internet expertise.
“We did not sell our Internet assets,” he said, touting Compaq’s investment in and technology alliance with CMGI. “We found it made much more sense to have a share in a much broader range” of Internet companies.
Analysts said the move is clearly a good one for Compaq, which has little experience managing Internet assets and which, on paper at least, recovers about a quarter of what it paid for AltaVista’s parent, Digital Equipment Corp., last year.
In the deal finalized Monday night, Compaq would receive a stake in CMGI worth $2.1 billion at Monday’s closing price. CMGI would also pay Compaq $220 million in cash over three years.
Analysts suggested Tuesday that AltaVista is likely to do better under CMGI’s Internet-savvy management than it has as part of Compaq. “Compaq has essentially let this asset flounder for the better part of a year and a half,” said analyst Patrick Keane of Jupiter Communications.
Compaq rose $1.06 to $23.38 on the NYSE, up from a 52-week low of $20 earlier this month, amid a rally in technology shares.
Compaq stock peaked at $51.25 in January, before it revealed that sales and earnings would fall short of projections. The company has been losing money as it tries to fend off more efficient competitors who sell directly to customers instead of through retailers. Falling PC prices have made matters worse.
For CMGI, the deal represents an opportunity to link its welter of Internet marketing and e-commerce businesses to a powerful and well-known, if under-marketed, search site. Although AltaVista registers 1.5 billion page views monthly and ranks among the top 10 Web sites in terms of visits, its popularity falls far behind that of Yahoo, Excite and Microsoft’s MSN.
CMGI Chief Executive David Wetherell said his Andover, Mass.-based company will integrate its stock chat service Raging Bull and other holdings into AltaVista’s engine for finding Web sites. The resulting portal would be displayed as the home page for Compaq’s popular Presario PCs for at least the next three years.
CMGI already has a minority investment in rival search engine Lycos, raising the awkward prospect of competition between the two. CMGI executives declined to say if the firm intends to sell its Lycos holdings.
For CMGI, the acquisition of a majority stake in AltaVista averts its reclassification as a stock mutual fund for tax and regulatory purposes. Many of the company’s holdings are minority interests in other firms.
CMGI shares surged $12.63 to $110.31 on Nasdaq.
CMGI executives acknowledged that the deals it made with Compaq aren’t exclusive and it can’t mandate that the companies it only partially owns do business with the computer maker.
“There has to be good business sense,” said CMGI Executive Vice President Andy Hajducky. “But as a result of this transaction, it’s going to be a lot easier working with Compaq in new and different areas.”
Compaq veteran Rod Schrock would remain in charge of Palo Alto-based AltaVista, its related retail site, Shopping.com, and Zip2, which develops local Web sites for media and other companies.
Analysts and rival portals said it is far from clear that consumers will flock to another all-in-one site, since Yahoo, Excite and others already crowd that space.
“As people become smarter, I look for more bookmarks and vertical portals” focused on particular interest groups or industries, said analyst Keane. “It’s becoming Coke versus Pepsi.”
Compaq’s acquisition of CMGI shares may enable it to benefit from the boom in Internet stocks. Compaq can begin selling CMGI shares in one year and is free to sell its entire stake in two.
CMGI hopes investors will still be wild for AltaVista later this year, when it plans to sell shares to the public. The search engine has revenue of less than $200 million annually but would be marketed as part of a $100-million joint CMGI-Compaq campaign.
“CMGI is positioned to be able to do a lot with AltaVista,” Keane said. “It’s kind of the black sheep of the herd, but it has good traffic. You always have to roll the dice in this space.”
