Internet Capital Group: Dotcom Boom Era High-Flyer Positioned for a Comeback?

Includes: ACTA, BBBB
by: James Levy
The more grizzled investors among my readers will likely remember Internet Capital Group (ICGE), the poster child of the dotcom boom. This publicly-traded venture capital company was perceived as the incubator of an endless stream of embryonic companies on their way to becoming the smash multi-billion IPOs of tomorrow. With impeccable timing, ICGE raised $179 million in an IPO in 1999, and reached a maximum valuation of over $60 billion at the height of the dotcom mania. In yet another example of the adage, "the bigger they are the harder they fall," ICGE also became the poster child of the dotcom bust, with its price per share declining to less than one dollar after reaching a high of $212 in December of 1999 (over $4,000 taking into account the 20 to one reverse split in May of 2004).
Historians of market bubbles have observed that the asset at the center of a bubble rarely becomes a worthwhile investment again until a decade has past since the bubble burst. I believe that it is indeed time to take a serious new look at ICGE, now a mere micro cap with capitalization of approximately $310 million. This share is "under the radar" of the vast majority of investors, but may well regain at least a part of its lost star quality in the coming quarters.
By my criteria, the most important factor in evaluating a micro cap share is the credibility and experience of the key people in the company. IGCE is in essence an exchange listed venture capital fund, and counts among its managing directors some of the most widely respected experts in the industry. ICGE has survived not only the dotcom bust but also the credit crisis and recession of 2007/2009, a very difficult period for micro cap shares as well as for venture capital. ICGE has emerged a decade after the dotcom bust with a cohesive management team who know from firsthand experience what it takes to survive a long famine without ever eating the seed corn. ICGE currently holds significant participations (ranging from 26% to 89% ownership) in eight core partners companies, most of which are now showing excellent growth, primarily in the business to business segment of the internet industry.
Core participations held by ICGE include the following:
  • 26% of SeaPass, an online platform offering real time connections between insurance carriers, agents and brokers.
  • 89% of GovDelivery, a platform for government-to-citizen communications solutions which doubled its subscription base to 15.6 million during 2009 and is now utilized by one half of US Federal agencies, state, county and municipal governments in 30 states, as well as several major United Kingdom government agencies.
  • 64% of ICG Commerce, a procurement outsourcing platform which has shown revenue growth of 28% to over $81 million during 2009 and EBDITA growth from $7.6 million to $13.4 million during the same period.
  • 33% of Metastorm, a Business Process Management software and services provider with over $19 million of bookings in the 4th quarter of 2009 that counts the United States Air Force among its clients.
  • 50% of Channel Intelligence, a leading provider of performance advertising services for manufacturers and retailers. Channel´s revenues increased 24% during 2009, and includes among its clients one third of the ¨Internet Retailer¨ Top 50.
  • 36% of StarCite, an on-demand global meetings solutions platform which increased 4th quarter books by 40% to $25 million as compared to the same quarter in 2008. The company counts Hilton Worldwide (NYSE:HLT) among its suppliers and several Fortune 500 companies among its clients.
  • 31% of freeborders, a global provider of information technology solutions delivered from China utilizing low cost but highly skilled Chinese software engineers.
  • 81% of Investor Force, a leading provider of business solutions for the institutional investment management industry, currently serving 5 of the top 10 institutional investment consultants. Investor Force doubled its revenue during 2009.
  • 36% of WhiteFence, a leader in online transactions for home services such as telephone, internet access, television, electricity and natural gas. Consumers enter their address in the website for free recommendations on how to bundle their required services to obtain the best price from 400 nationally recognized partners to reduce their home services bills.
ICGE´s investment policy is to seek one to three new majority control participations of $10 to $30 million each year in high margin, low capital expenditure ventures in the areas of Software as a Service, Technology enabled Business Process Outsourcing, and internet marketing. The company has plenty of ammunition on hand to hunt down these opportunities. As of year end 2009, ICGE had over $55 million in cash as well as $78 million in participations in Nasdaq listed educational software provider Blackboard (NASDAQ:BBBB), an earlier ICGE success story.
The cash and Blackboard participation alone represent an amount equal to more than one third of ICGE current market capitalization. Additionally, the fourth quarter 2009 results released on February 25th were excellent, showing a 17% increase in ICGE´s consolidated revenue to $24 million, and a 72% increase in core company partipation´s aggregated EBITDA to $6.7 million. Yet another positive factor is that ICGE has available over $55 million of historical Net Operating Losses to apply against its tax liabilities in 2010 and beyond.
Will one of ICGE´s core companies be the focus of a hugely successful IPO in the coming quarters? I don´t know. However, I am very intrigued by a cluster of insider buying by three key ICGE executives in December of 2009. These three highly placed insiders made a combined open market purchase of nearly $500,000 in ICGE shares at year end, significantly increasing their holdings, though none of them had purchased ICGE shares in the open market during the previous five years. A further demonstration of the confidence of the management team in the prospects for ICGG in the coming year is the company´s buy back of 14 million of shares during 2009, reducing the total numbers of shares outstanding by 3.4%. During the past year institutional investors have begun to revive their analyst coverage for ICGG. The latest recommendation was a strong buy on March 26th 2009 from Fetl and Co., with a target price of $14 per share.
Will ICGE be an example of Dotcom Boom Redux? I doubt it. However, I do believe that ICGE ´s current share price is an attractive entry point which allows investors to purchase a participation in a diversified portfolio of carefully chosen and monitored high quality pre-IPO growth companies. In turn, these companies benefit from the resources, both human and financial, of the tremendously experienced directors of their ICGE "partner." If the recent thaw in the IPO market continues, any one of these participated core companies could be spun off to realize considerable value for ICGE shareholders, or alternatively sold directly to a larger company seeking a new growth business. At the same time, until these opportunities materialize, ICGE´s management has demonstrated in the recent lean years that they have the tenacity and financial resources to continue to cultivate their garden of core participations in preparation of a bountiful shareholder harvest in the future.

Disclosure: The author is long ICGE common shares.

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