A CMGI Without The Value

Maybe it's the fact that Safeguard Scientifics is in Wayne, Pa. Maybe it's that Safeguard's been around since 1953.

Maybe it's the fact that Safeguard Scientifics is in Wayne, Pa. Maybe it's that Safeguard's been around since 1953. Or that conservative name. The bottom line is that investors certainly aren't treating the company like glamour-plays CMGI or Internet Capital Group.

The three firms are all basically in the same business. They take stakes in young technology companies, help operate them and then reap the rewards when the companies go public on their own. Safeguard is just now turning its attention to Internet properties, but it's had some notable successes with other technology companies, including Cambridge Technology Partners, Sanchez Computer Associates and Novell.

But Safeguard's market capitalization stands at only $2.5 billion, even though the value of its publicly traded holdings is about $2.8 billion. That doesn't count its activities in six different venture funds or its 20 direct investments in private companies.

"If this were a closed-end fund, it's trading at a discount to its net asset value," says Michael Legg, an analyst who follows Safeguard for Prudential Securities.

It's not entirely clear to Safeguard Chief Operating Officer Harry Wallaesa why the company is valued below its competitors. CMGI has about $2.6 billion in securities, and has a market capitalization of $8.7 billion despite its recent slump. Internet Capital Group's current market capitalization stands at $10.7 billion, from which Safeguard gets $1.8 billion of its own market valuation, since it holds a 15 percent investment in the company.

"I think from an operational and strategic standpoint we are very similar to CMGI and Internet Capital Group, [but] both receive a huge premium for their private portfolio," Wallaesa says. He suspects it has something to do with the fact that Safeguard has been around for a time, while CMGI and Internet Capital Group haven't had their investments age yet.

Safeguard clearly sees the Internet as its next big opportunity. All of its new investments now must fall into one of three areas: electronic commerce, enterprise applications and services, or network infrastructure. Wallaesa's investment criteria sound similar to those of traditional venture capitalists trying to make a killing on the Internet. First, Safeguard looks at the quality of management, followed by the size of the market opportunity and the strength - and margins - of the business model. If the company excels in those areas, but won't help drive efficiencies for other Safeguard companies, Safeguard won't invest directly, although the company could receive money from one of Safeguard's affiliated funds.

Analysts expect Safeguard to take three companies public every year. Its most recent initial public offerings have done well. Internet Capital Group is up 756 percent, to $102.75, from its August offering price of $12 pershare. US Interactive, a consultant and systems integrator along the lines of Proxicom or Scient, is up 128 percent, to $22.75, since its public debut in the same month. Safeguard recently announced plans to take public Pac-West Telecomm, a competitive local exchange carrier in Northern California and Nevada.

Other recent Safeguard initial public offerings have fared less well. ChromaVision Medical Systems went public in July of 1997 at about $11.50, but it's been trading recently at $11.81. OAO Technology Solutions also debuted at $11.50, but is now trading at $3.25.

"The Internet is new ground for Safeguard," Prudential's Legg says. "They are very well positioned to capitalize on the Internet opportunity." Safeguard's challenge is to prove that the company can duplicate Internet Capital Group's success. Safeguard's shares have risen dramatically in the past year, up 154 percent from $28.38 to $72.13.