ANDOVER, Mass. – CMGI Corp.’s $2.3 billion acquisition of search engine AltaVista from Compaq Computer Corp. in June fortified the company’s Internet distribution platform, and now the firm plans to raise as much as $1.6 billion in two additional funds for its venture capital arm, @Ventures.
CMGI in late June completed a $375 million private placement of Series C preferred stock with four undisclosed institutional investors.
@Ventures General Partner Brad Garlinghouse said proceeds from the private placement will go toward raising a late-stage crossover fund and a fourth early-stage venture capital fund.
“Our existing fund isn’t designed to make investments in companies valued at more than $50 million,” Mr. Garlinghouse said. “The @Ventures crossover fund will make investments that today we pass on due to the valuation.”
The crossover fund will invest between $10 million and $25 million for minority positions in companies valued between $50 and $150 million, Mr. Garlinghouse said. @Ventures IV will invest $5 to $10 million in seed and early-stage companies, in a similar fashion to predecessor @Ventures funds.
CMGI’s recent participation in Koz.com’s $15.2 million fifth round of financing typifies the company’s early-stage strategy. The Research Triangle Park, N.C.-based company develops Internet tools for local businesses and media properties.
“CMGI is aggressive in finding points of synergy between its portfolio companies,” said Koz.com vice president Bruce Milligan. “There will be interesting opportunities between the Koz.com network of local media and the AltaVista national portal and local directories.”
Mr. Garlinghouse would not disclose potential limited partners for either fund. Limited partners in the $272 million @Ventures III, which was the first fund that CMGI opened to outside investors, include Microsoft Corp., Vulcan Ventures, King World Productions, BancBoston Capital, LVMH Moet Hennessy Louis Vuitton, Sumitomo Corp., Onex Corp. and JAFCO American Ventures.
A source familiar with CMGI indicated that the company could raise as much as $1.25 billion for the crossover fund and is targeting $400 million for @Ventures IV.
Shoreline Pacific Institutional Finance of Sausalito, Calif., placed the offering, the second private round Shoreline has raised for CMGI since December, when the company raised $50 million subsequent to closing @Ventures III.
Harlan Kleiman, Shoreline’s chief executive, said CMGI has opted to raise private rather than public equity to control the environment of the deal. “Public offerings take time … and you can’t negotiate with investors as to the way you want them to handle the stock,” Mr. Kleiman said. “This way, we know when we find the institutions we can set up a pro forma of what the company is looking for.”
New Internet Life for Alta Vista and Compaq
Mr. Garlinghouse said the AltaVista transaction will help CMGI leverage the potential value of its other portfolio companies. CMGI plans to use Alta Vista as a platform for its network of more than 40 Internet companies, including MotherNature.com, Raging Bull and Thingworld.com.
“We are able to bring to bear a distribution mechanism that greatly enhances the value of our companies’ current position in the marketplace,” he said. “CMGI’s properties will in turn add valuable assets to AltaVista.
AltaVista, which Compaq acquired from Digital Equipment Corp. in 1998, was the tenth most visited Internet property in May, according to Media Metrix, an Internet research firm.
Through the AltaVista deal, Compaq will receive 19 million common shares and 1.8 million preferred shares of CMGI stock, representing a 16.4% equity stake in the company. CMGI will also give Compaq a $220 million three-year note.
In addition to AltaVista, CMGI will acquire Shopping.com and Zip2 from Compaq. CMGI properties will be bundled within the hardware of Compaq personal computers. The two companies have also agreed to collaborate on research and development, and have each allocated $50 million to market the properties involved in the deal.
AltaVista, which is considered among the more technologically advanced search engines, has received less than $1 million in marketing support since being acquired by Compaq. CMGI Chief Executive David Wetherell said AltaVista is capable of going public after flirting with an initial public offering in February.
“AltaVista can go public at any given moment,” Mr. Wetherell said. “Our business model is to take companies public when they are ready.”
Mr. Rosen added that Compaq had evaluated several options for AltaVista before partnering with CMGI. “We had conversations with everybody in the industry about partnerships,” he said. “CMGI was a better alternative than a public offering.”
Compaq, which is the largest global supplier of computer systems, has been criticized for its lack of focus in the Internet space.
“We thought it would make much more sense to own part of a broad portfolio of Internet companies rather than 100% of one property,” said Compaq Chairman and acting Chief Executive Ben Rosen.
Internet.com analyst Chris Nerney said the joint venture makes sense for both companies as Compaq will benefit from CMGI’s knowledge of the Internet. “CMGI understands the Internet a lot better than Compaq does,” he said. “CMGI wants a large portal presence on the Web, and that may be available through AltaVista, which has so far been under-utilized.”
The deal allows CMGI to be classified as an operating company rather than a mutual fund, as it had been, thereby relieving the company of regulatory requirements.