Safeguard Scientific Makes Internet Investment Moves

The latest stock leaning towards being an Internet powerhouse made the rounds on the squabble box: Safeguard Scientific (NYSE:SFE), prompting many followers of my analysis to email me asking how it fits in the Internet investment landscape. Here’s how:

The short answer is you know a tree by its fruit. In other words, Safeguard’s picks in the Internet space to date have been very mixed fruit. Safeguard is a venture-capital-like entity that has the broader mantra of investing in IT, information technology.

A couple of squawkings ago its chairman was on CNBC March 16 and said it was now committed to investing in the Internet. A recent example a 20% fully diluted ownership interest in Extant. Extant provides wholesale extranet and virtual private network (VPN) services to Competitive Local Exchange Carriers (CLECs) and Internet Service Providers (ISPs).

SFE shares jumped 25% that day to $59.6875. Indeed, SFE was already an investor in some Internet firms, one which made it to the public with some visibility, VerticalNet (NASDAQ:VERT).

Of all Safeguard’s various capital partnerships ICG and TL Ventures seem to have shown the most promise. VERT came out of ICG (which Safeguard owns 26% of), and TL ventures. Other investors in ICG are Compaq and Comcast. Both ICG and TL were early investors in MatchLogic (sold to Excite) and WiseWire (sold to Lycos), both great Internet properties that I think sold for a dime in a dollar world.

One of the firms in Safeguard’s portfolio now at the gate to go public is Who?Vision Systems, which IDs Internet users by their fingerprints. If not for its revenues and earnings power it might be easy to dismiss Safeguard as playing catch up in the Internet space, which it is in my opinion. But throwing off nearly $2.275 billion revenue for 1998 and $110 million earnings, $3.46 EPS, got my attention.

While it’s not Internet revenue/earnings given the company’s public commitment March 16 to focus on the Internet with that kind of cash flow and leverage, could make Safeguard a bigger player in the Web space. The key lies in the market cap: $1.7 billion.

I wouldn’t give SFE an Internet multiple valuation yet but the obvious gap here in my opinion looks like SFE trades below its revenue with a price-to-earnings of 18.

Let me break down at least one of the value points. ICG owns 38.4% of VERT. At $1.5 billion market cap as of March 17 SFE’s exposure to VERT was valued at $150 million (SFE owns 26% of ICG).

One example of Safeguard’s new ecommerce focus. At this juncture I wouldn’t compare SFE to CMGI since CMGI has been successful since 1995 in making Internet investments with huge returns, cumulative more than 1,300% for its @Venture unit. CMGI’s @Venture unit is also one of the most active investors in the Internet along with Softbank.

So Safeguard’s got a ways to go before it’s in the same league in my opinion, if it makes it there at all. With WiseWire, MatchLogic and VerticalNet it has a small start at finding mixed levels of winners. It’ll take a huge sustainable home run (which may be VERT if the stock price doesn’t drop) to prove to investors that Safeguard has what it takes play in the big leagues of Internet investing. Safeguard is 5 years too late on the first big wave that yielded Yahoo, Netscape, Amazon, GeoCities, eBay. Strategically it makes you wonder if it was so focused on IT how it missed those opportunities. Perhaps the next 5 years will tell otherwise.

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