The B2B Ladder Approach
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Investors who have until this point shunned the business-to-business (B2B) sector for consumer oriented issues, have recently taken notice of the emerging wave.
It's hard to ignore a sector that will do 10x the amount of revenues that the B2C market will do in 2003 (B2B=$1.3 trillion vs. B2C=$108 billion). Whether we're talking books or bolts though, Internet stocks remain highly volatile and risky investments.
Recognizing the potential market opportunity, I've come up with an approach to help investors enter the sector on his/her own terms. I call it the "B2B Ladder" and the idea is that the higher a company stands on the ladder, the less risk for investors. The approach was created with three top-tier B2B companies in mind, all having a relationship with one another. I've started from the top down from the least amount of risk to the stock with the most risk, with regard to the ladder.
Safeguard Scientifics (SFE)
Ladder Value: Owns 14 percent of Internet Capital Group (ICGE)
Wednesday's close: 113
52 week range: 24-127 >
Market Cap: $3.953 billion
Revenues for nine months ended 9/30/99: $2.33 billion
Shares Outstanding/Float: 34.8M/27.5M
Investor Insider: Safeguard Scientifics has been an investor in Internet Capital Group since 1995 and the founders of ICG came from Safeguard. It appears that the apple doesn't fall far from the tree.
Founded in 1953 (the company constantly changes its business strategies), Safeguard Scientifics is an Internet holding company that acquires, operates and manages business-to-business companies. SFE focuses on companies engaged in e-commerce, e-communication, and e-business services. Safeguard currently has 12 public partner companies including Internet Capital Group, U.S. Interactive (USIT) and Pac-West Telecomm (PACW). If you consider the market caps of these three stocks, along with Safeguard's ownership stakes, you begin to see the assumed underlying values of SFE investments.
The combined market caps of USIT, PACW, and ICGE as of Wednesday's close were $21.8 billion. The ownership stakes for Safeguard: USIT-11%, PACW-7%, and ICGE-14%. So the market value of Safeguard's investments in these three companies alone, is worth $2.94 billion at current public market prices. The average investment stake for Safeguard in its public partner companies is closer to 25 percent.
The average stake in its 21 private partner companies is 37 percent. Two of these companies set to hit the public market soon are eMerge Interactive, an online marketplace for the cattle industry, and Opus360, a hub that links IT professionals with employers.
Investors in Safeguard are treated to the company's "directed share subscription program," which allows Safeguard shareholders to purchase one share of partner companies going public, at IPO price, for every 10 shares of Safeguard stock.
Internet Capital Group (ICGE)
Ladder Value: Owns 36 percent of VerticalNet (VERT)
Wednesday's close: 159-9/16
52 week range: 14 - 195-9/16
Market Cap: $20.2 billion
Revenues for nine months ended 9/30/99: $14.8 million
Shares Outstanding/Float: 126.6M/14.9M
Investor Insider: ICG pursues a strategy similar to CMGI (CMGI), but invests exclusively in the B2B space. ICG partner companies are therefore targeting larger market opportunities, important because the value o