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.

News Around the Web