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RealTime IT News

Panic Time In Internet Land

If the Internet stocks meltdown of last spring was an overdue and unsurprising wake-up call to giddy investors, the freefall currently gripping 'Net tickers is an unanticipated terror ride.

Whereas the spring massacre was viewed as a useful, if somewhat painful, mechanism for thinning out the weak and undeserving, the nasty 'Net ticker avalanche now in progress threatens some companies previously anointed by many investors and analysts as sure-fire winners.

Who could have predicted in January, for example, that by the end of this year CMGI would be forced to assure investors that it wouldn't run out of money any time soon?

But there was CEO David Wetherell on Friday, promising in a statement to reduce the company's $63 million monthly burn rate and noting that he recently bought up 250,000 CMGI shares on the open market.

This isn't some small-cap e-tailer that raised $30 million in an IPO underwritten by a no-name investment bank. This is the Internet's premiere incubator, an operating and development company aggressively investing in a variety of 'Net sectors, an 800-pound gorilla with a market capitalization, at the beginning of the year, of $35 billion. Today, CMGI is valued at $6.3 billion, and shares were down 85% for the year through Friday.

Then there's VerticalNet , one of the first companies to ride the B2B e-commerce wave. Way back in August 1999, Merrill Lynch Internet analyst Henry Blodget touted VerticalNet and its parent company, Internet Capital Group, as being among the 25% of 'Net players that will survive the coming shakeout.

VerticalNet runs 57 online vertical trading communities for a wide variety of industries, including fiber optics, oil and gas, meat and poultry, dental care and solid waste.

But VERT faces two big problems. One, which I've always thought was a flaw in its business model, is that it's too unfocused. Some investors see the breadth of different industries served by VerticalNet's trading exchanges as a sign of strength and stability, like a diversified portfolio. All I see is lack of synergy. I mean, how do you leverage Machine Tools Online with Adhesives and Sealants.com or Nurses.com? You don't.

The second and perhaps more significant problem surfaced last Friday when a report by Wedbush Morgan Securities revealed that many businesses paying VerticalNet to sell their products through the company's E-Commerce Centers are dissatisfied with light traffic and low return on their investments.

"VerticalNet's Web sites work only if the communities receive a large number of unique visitors," the report said. "Unfortunately, the traffic is very light."

And Minnesota Mining and Manufacturing Co., the largest of VerticalNet's E-commerce Center customers, has recouped only 10% of its investment in the past eight months, the Wedbush report says.

The market's response to this gloomy assessment was swift and severe, and VERT shares nosedived 24% on Friday to finish at $21.75, their lowest closing price since early last October and 84% below their Jan. 27 closing price of $138.38. (By early Monday afternoon, however, VERT had gained 10.6% to $24.06.)

Wedbush predicted a customer exodus, which would put even more pressure on new CEO Joseph Galli's electronic marketplace software division, charged with the daunting challenge of competing with Commerce One, Oracle and Ariba.

Galli embarks on a road show this week to begin restoring investor confidence. But what he says to institutional investors isn't likely to carry as much weight with the market as VERT's third-quarter report, which is slated to be released on Oct. 24. After all, these days investors, like TV viewers, are into reality programming.



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