RealTime IT News

Opportunity And Uncertainty

Either Internet investors have short memories, or they just don't know how to value a company.

Witness Monday's reaction to the latest pair of 'Net marriage proposals. E-commerce software maker Vignette said it would buy B2B supply software vendor OnDisplay for $1.7 billion in stock, while B2B e-commerce service provider WebMethods announced it would purchase e-commerce infrastructure software company Active Software for $1.3 billion in another stock swap.

Investors rewarded the acquiring companies, Vignette and WebMethods, with a hell ride down the stock charts. As of early Monday afternoon, VIGN was down 27 percent to 31 15/16, while WEBM had fallen nearly 18 percent to 71 5/8.

Meanwhile, the two companies being bought saw their share prices drop slightly through Monday's early trading. ONDS was off 6 percent to 50 1/8, while Active Software slipped 3 percent to 32 1/8. But with the Nasdaq down 5.5 percent, those losses can't be attributed to the two planned deals.

What has sparked investors' concern are the prices Vignette and WebMethods are willing to pay on a per-share basis. In swapping 1.58 shares of its stock for each share of OnDisplay's, Vignette is valuing ONDS at $69.22 per share, or 30 percent more than its Friday closing price of 53 <.

Clearly the market believes Vignette is overpricing OnDisplay's stock. It should be pointed out that this is the same market that valued ONDS at 132 = on March 14, less than 10 weeks ago.

WebMethods is willing to pay an even higher premium to buy Active Software, setting a price of $45.85 for each share of ASWX. That's 39 percent above Friday's closing price of $33.

As was the case with ONDS, however, investors recently had a different opinion of Active Software, pricing shares as high as 149 1/8 on March 20.

Which leads us back to the first question: Do investors have incredibly short memories, or are they simply unable to determine what an Internet firm is worth?

The answer is both of the above, though on the second count, you can't really fault them because they have plenty of company. Ask 10 analysts how they would value any given Internet player, and you're likely to get 10 different answers.

That's the nature of an early-stage industry. With short track records and unproven business models the rule rather than the exception, investing opportunities are laced with doubt, uncertainty and risk.

Until March, investors placed more weight on the opportunity. Now, with no rebound from this spring's correction in sight, they are plagued with genuine questions and reservations about the ability of many Internet companies to survive.

And as long as investors continue to err on the side of caution, Internet companies that place a premium on the value of the firms they're acquiring will face a frosty reception.