April 2000 Contents
Venture Capital, While Risky Investment, Can Be an Effective Tool to Hedge Market Too much stock-market exposure? Try venture capital to diversify portfolio risks. Venture capital is probably one of the last things most investors would think of. But the performance of venture capital has almost no correlation to the stock market, making venture capital an effective hedging tool. Money is pouring into venture capital to chase the hot performance of new technology-stock offerings. Over the years, venture-capital funds have been strong performers, but extraordinarily risky ones. The venture funds are far riskier investments than the other asset classes. The venture funds’ 45% average return had a standard deviation (a measure of volatility) of 115.6%, compared with standard deviation of 15.65% for the S&P 500.For the S&P 500, there is a 95% chance any given year that returns will range from 45% profit to a 18% loss. For venture-capital funds, there is 95% chance that the performance will vary from a 276% profit to a total loss. Despite the risks, venture-capital values don’t move in line with the stock market and therefore are a good alternative investment. While small stocks have a 67% correlation with the S&P 500 and international stocks a 48% correlation, venture-capital funds have only a 0.4% correlation. Venture-capital investments are typically relying on one idea or product. If that idea or product takes off, the valuation is going to take off. If it doesn’t, the investment would be worth nothing. The success of the idea doesn’t have a whole lot to do with what the general stock market is doing. Recently the strong stock market has proved a windfall for venture-capital firms, and may skew the data toward a higher correlation between the public and private markets. What we would see on more recent data is greater correlation with public stocks, because the IPO market is so good for venture-capital companies. Venture-capital is not significantly correlated with the public markets, but that will vary depending when we’re taking the data. The challenge in measuring the performance of venture capital and other private-equity funds is that the day-to-day value of their assets is typically unknown. Unlike public stocks, the value of investment in a private company is known only when the investment is sold.
Open TV to Buy Web-Pioneer Spyglass for $2.5 Billion in All-Stock Deal In another sign of Internet-industry consolidation, OpenTV Corp. will pay $2.5 billion in stock to acquire Spyglass Inc., one of the Web’s earliest pioneers as a maker of a landmark browser technology. OpenTV, is buying the Naperville, III., company to increase the breadth of its offerings in the high —speed arena, as well as for wireless connectivity. Spyglass shares have been on the rise recently because it has signed a number of deals to expand the use of its Internet technology, which grew out of the ground-breaking Mosaic browser software created at the University of Illinois in the early 1990s. While Netscape Communications Corp., now part of America Online Inc. and another offshoot of Mosaic, was better known, Spyglass’s technology is at the heart of Microsoft Corp’s Internet Explorer. Recently Spyglass has focused more on making browsers and other Internet technology for a wider range of device well beyond personal computers. In that way, Spyglass is fast becoming a competitor of OpenTV and also players such as Liberate Technologies, of Redwood Shores, Calif., which all sell software for digital set-top boxes used by cable operators, satellite-television-network operators and broadcasters. These companies are attempting to play a larger role in the delivery of digital-broadband services to customers. Under the terms of the deals, Spyglass shareholders will receive 0.7236 OpenTV share for each share held. Spyglass shareholders will receive a total of 15 million shares, representing 18% of the combined company on a fully diluted basis. The deal value Spyglass at $122.28 a share The transaction which has been approved by both companies’ board, requires regulatory and shareholder approval and is expected to close in three to four months. Headquarters for the new company will be in Mountain View, but the Napperville facility will remain open.
Alley firms lead parade in year of merger frenzy Acquisitions have become the growth vehicle of choice for Alley firms’. Industry observers say the number of acquisitions in Silicon Alley is rising in part because of a perceived need by Internet companies to build their franchises as fast as possible. For Internet firms in New York, mergers have become business as usual. Last year, out of the 1,035 merger deals that were announced involving New York companies, 158 were in the computer software and services industry and most of those involved in Alley firms. The explosion of dot-com deals helped lift the number of transactions involving New York companies up 42%, from 730 in 1998. Rather than missing the boom, smaller dot-coms are selling out to get publicly traded shares rather than waiting around for an IPO. As for an example of explosion deals, look at Oxygen Media’s strategy, which is not unique in Silicon Alley. In order to be competitive in their industry, they have to get to critical mass in short order. Even before it had fully launched its cable channel-cum-Web site targeting at women, they made two acquisitions Girls On and Intype, two competitors. In 1999, the second most active industry for merger and acquisitions in New York was media, followed by communications. New York companies were involved in 11% of all mergers or acquisition nationwide. Across the country, 9,278 M&A transactions were announced, with a total value of $1.4 trillion. The number of such deals was up 18% from the 7,809 announced in 1998. Last year wasn’t that much bigger than the year before, but you were coming off an enormous base. What was different was it was more concentrated in certain industries. There are few places in the country where companies were busier combining than in Silicon Alley. Internet advertising firm DoubleClick spent more than $2.3 billion on its three purchases of competitors: NetGravity Inc.; Abacus Direct Corp.; and Opt-in Email.com Acquisitions have become the growth vehicle of choice for Silicon Alley.
FireDrop Hopes to Radically Alter E-Mail FireDrop, a secretive start-up with high-profile backing is mounting an ambitious effort to change the way people communicate online. The Redwood City, Calif., company has developed a technology called Zaplets that combines attributes of e-mail and the Web. A user sends one Zaplet to several recipients, who can view them with most e-mails program. But while most electronic collaboration requires a string of e-mails, each Zaplet is automatically updated with recipients’ responses. Office workers selecting the best time for a meeting, might send out a calendar Zaplet that adds notations as each employee indicates preferred times. A brokerage firm might mail out a client’s stock portfolio each morning, but graphs would reflect later trading when the customer opened the message in the afternoon. A newspaper could send out one set of headlines in the morning and revise them completely by dinner, though only one Zaplet arrived at the user’s mailbox. Each Zaplet is akin to a Web page that is generated on FireDrope’s servers each time a user activates it. For that reason, they can be slower to call up than conventional e-mail. With an estimated 150 million e-mail boxes, the company acknowledges that managing a huge number of Zaplets with acceptable performance will require massive investments in computer infrastructure. The company is building one of the largest systems on the Internet. The company is the latest project of venture capitalist Vinod Koshla of Kleiner Perkins Caufield & Byer, a Palo Alto, Calif., firm that has backed such Web stars as Netscape Communications Corp., Amazon.com Inc. and Sun Microsystem Inc. Though Kleiner Perkins has put only $5 million into the company so far, Mr Khosla makes clear that money isn’t likely to be a problem as FireDrop attempts to build a new communication platform. The company is releasing a test version of the service today, offering a dozen ready-made templates to allow people to start using Zaplets, including forms for scheduling activities, taking polls, holding discussions, sharing pictures and writing interactive stories. FireDrop plans to let consumers use the service free, but charge companies for building large-scale applications for internal collaboration or customer service.
BellSouth, SBC near Final Stages of Talks to Merge Wireless Units BellSouth Corp. and SBC Corp. are in final stages of talks to merge their U.S. cellular-phone systems and could announce a deal. The discussions are centered on creating a company that marries the U.S. wireless assets of the two Bell operating companies. SBC, San Antonio, has 11.2 million wireless customers, mostly in the western, midwestern and southwestern U.S. Bellsouth, based in Atlanta, has 5.3 million wireless customers, primarily in the Southeast. The two companies would likely launch an initial public offering of shares of the business, and use that new currency to expand. The two Bell also are discussing terms that call for joint management control. However, based on the size of the business, SBC’s contribution of assets would represent 60% of the value, while BellSouth would represent 40%. The new wireless company with 16.5 million customers would be second in size to the pending wireless venture of Vodaphone AirTouch and Bell Atlantic Corp. That combination, which brings together the U.S. wireless assets of the two telecommunications giants, will boast more than 20 million customers. SBC and BellSouth’s wireless company would operate in 40 of the nation’s top 50 markets, putting it on par with AT&T Corp., now largest U.S. wireless company, and Sprint PCS Corp’s wireless business. Bell South values its domestics wireless assets at more than $21 billion and some analysts value the U.S. Bell Atlantic-Vodaphone venture upward of $80 billion. AT&T values its wireless holdings at $75 billion. Wireless companies have been moving to increase their heft through acquisitions and joint ventures with the aim of allowing customers to use their cell phone anywhere. By combing their networks, which operates on the same wireless technology, the two companies will control a wireless network that covers a good chunk of the country.
Japanese Business in the United States u Toyoda Boshoku Corp., a member of the Toyota Motor Corp. group, plans to open an interior-parts manufacturing plant in North America by 2003. The textile maker will start out by supplying local Toyota operations with stand-alone components into packaged units and to broaden its customer base in North America by selling to automakers outside the Toyota group. The company plans to invest about 500 million-yen in the new plant, focusing on the areas near Toyota facilities in site selection. At present, Toyoda Boshoku’s only overseas plant is in Thailand.v u Fuji Heavy Industries Ltd., the manufacturer of Subaru cars, plans by 2002 to develop and market a new sport —utility vehicle specifically targeting the North America market. Spurred by its capital tie-up with General Motors Corp., Fuji Heavy is poised to make further inroads in the world’s largest automobile market by expanding its vehicle lineup. Under the partnership with the world largest automaker, Fuji Heavy will supply Subaru Model to GM-affiliated dealers and also assemble cars at GM production facilities. Fuji plans to develop a high-performance, four-wheel-drive SUV based on the ST-X, which was unveiled in January at the Los Angeles motor show. Because it will be built on a passenger-car platform, the new vehicle will offer greater comfort than truck-based SUV’s. v u Mitusi & Co. has begun an Internet based information service on U.S. rail-cargo transport. The service, which reports on the progress of shipments, is aimed at helping shippers reduce inventory. The big trading house leases out freight cars in the U.S. and aims to use the service to boost the business. Mitsui owns 10,000 freight cars for lease and intends to spend more than $100 million aver the next three years to expand its fleet of rolling stock to 60,000. Mitsui plans to mainly serve power utilities, which have been forced to maintain large stocks of coals as they depend on the mineral for 30% of their energy needs. v u Nippon Express Co., Japan’s largest freight forwarder, in April will set up a new company in the U.S. aimed at offering distribution-related consulting service exclusively to U.S. multinationals with operations in Asia. Nippon Express Global Logistic Inc. will be a wholly owned subsidiary of Nippon Express U.S.A. Inc., which caters to Japanese companies in the U.S. The new unit will be capitalized at $500,000. v u Shinanen Co. will begin in April to sell an inorganic anti-bacterial agent in the U.S. The company, a fuel dealer suffering lackluster profits from its mainline petroleum product, will sell the agent to U.S. companies for use in anti-bacterial goods, including household and medical product. The company sells the substance in Japan and exports it to China and Europe. Shinanen recently received sales authorization from the U.S. Environmental Protection Agency.v
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