large and small
Tribune Technology Writer
October 17, 2000
If misery loves company, Divine Interventures
Inc. shareholders have plenty of both.
The Internet incubator's stock has lost more
than 65 percent of its value since it went
public 13 weeks ago at $9 per share, closing
Monday at $2.87 a share. Earlier this month
it hit a low of $2.25 a share, below even the
value of its cash holdings.
Andrew 'Flip' Filipowski
(Tribune photo by Charles Osgood)
Yet Divine's languishing stock doesn't take a full accounting of the pain felt
by investors in a company that was touted nine months ago—at the height of
Wall Street's Internet euphoria—as Chicago's best hope for grabbing a
bigger share of new economy riches.
Founder and CEO Andrew "Flip" Filipowski recruited a "who's who" of the
local tech and venture investing community to Divine's board last fall while
raising a total of $430 million from wealthy individuals and companies.
Backers bought into his ambitious vision for building a global consortium that
could rapidly grow Internet-related businesses in areas like Chicago, where
venture money is relatively scarce.
Now, "everyone is underwater except for people who got shares for
nothing," noted a local investor who bought at the pre-IPO price of $6 per
share, split-adjusted.
"I think you can make a computation of how many shares of anguish that is."
Indeed, Divine, which attracted a total of $768 million in equity capital in less
than 12 months, now has a market value of less than $400 million.
Bottom line: Investors have sustained more than $368 million in paper
losses.
The pain is spread widely among high-profile individuals such as Chicagoan
William Wrigley Jr., who invested $17 million before the IPO, and corporate
powers such as Michael Dell's Dell Computer Corp., which invested $100
million in January.
To be sure, Divine is not alone in disappointing its backers since Wall
Street's tech-stock wreck in April.
The two closest comparable stocks—CMGI Inc. and Internet Capital
Group, both more mature Internet consortiums—are down about 90 percent
from their 52-week highs. For the 13-week period since Divine went public,
they are down 60 percent.
"It's been brutal and very ugly for our entire sector," Filipowski said in an
interview last week. "It gets to the point where it's depressing to look across
the entire spectrum of the technology marketplace. It is just very difficult to
make peace with the fact that the market ... is putting these kinds of value on
companies."
Filipowski conceded there is no "magic bullet" for Divine's stock or for the
company's prospects short-term.
"You have to survive these periods so you can exist on the other end of the
cycle, when the picture gets a little bit better," he said.
Meanwhile, Divine will continue cutting expenses, looking for opportunities
to sell or merge some of its holdings while investing only in the most
promising of the 50-odd start-ups in which it took stakes, according to
analysts and observers.
Divine had $327 million in cash in mid-August, which analysts estimate will
last at least two years based on the company's spending rate.
Strong backers such as investment bank Robertson Stephens, which took
Divine public, say the stock is cheap.
"A lot of stocks have been hurt because something's changed fundamentally,
but there's been nothing company-specific that should affect Divine's stock
other than market sentiment," said Robertson Stephens analyst Michael
Graham.
Because Divine's stock is trading near the level of its cash, he said, investors
essentially are getting Divine's portfolio of start-ups for free.
Divine's book value, or the money it invested in start-ups plus its cash on
hand, is $6.10 per share, and Graham believes Divine's fair market value is
as high as $32 per share.
Yet investors clearly aren't buying that argument. One reason is that
portfolios of start-ups without financial track records are notoriously hard to
value.
Another is that when markets turn down, portfolios of assets that can't easily
be liquidated trade at steep discounts. Investors don't want to buy them at
any price. And, as Morningstar analyst George Nichols said, they "aren't
willing to wait years."
Of course, shareholders who bought stock before the IPO have no choice
but to wait at least six months before selling because of "lock-up"
agreements signed by pre-IPO investors.
Corporations that invested a combined $218 million in a private placement
concurrent with the IPO can't sell for 12 months after the IPO. Their
average cost basis: $8.48 per share.
That includes Aon Corp., BancBoston Capital Inc., CMGI Inc., Compaq
Computer Corp., Hewlett-Packard Co., Level 3 Communications,
MarchFirst Inc., Microsoft Corp. and 360networks Inc.
Such investors typically look to recoup their money longer-term by selling
products and services to the entity in which they invest. In Divine's case, the
hope is Divine's start-ups will be customers.
Microsoft, for instance, required that Divine purchase $15 million worth of
software and services and spend $4 million to promote Microsoft's services
to its associated companies over four years. In addition, Divine is obligated
to invest $50 million on projects and companies in the Seattle area, where
Microsoft is based.
A Microsoft spokeswoman declined to comment last week.
At Dell Ventures, the investing arm of Dell Computers, patience is the
watchword, says marketing director John Thompson. Dell Ventures, with
about $1 billion under investment, bought $100 million worth of Divine's
shares in January at $6 per share, split-adjusted.
Divine had bought $5.6 million of Dell computers and services as of June 30,
according to Securities and Exchange Commission filings.
Thompson said Dell doesn't look for a quid pro quo return, though it does
hope its investments will appreciate. Rather, it looks to establish relationships
with companies that are developing technologies that may offer opportunities
for future partnerships.
"Having a relationship with Divine is a good thing both today and going
forward, because of the innovation that occurs as the young companies
sprout," Thompson said. "It cements the relationship."
Likewise, Compaq's vice president of corporate development, Bud Enright,
said his company is "very positive" about its investment in Divine despite the
stock showing.
"We've got people dedicated to their associated companies. We're making
progress on a number of fronts. We see the Internet as a fundamental
change in the way businesses will conduct commerce, and because of that,
we believe Divine's companies will have a big impact in the Midwest."
Local investors, based on interviews with several last week, divide into two
camps. Some believe they took a risk in an euphoric market and likely have
lost.
Others believe that, despite the market reversal, Divine's prospects are
unchanged.
Jim Tyree, chairman and CEO of Mesirow Financial, is a longtime friend of
Filipowski who invested $15 million for his firm before the IPO.
"Evidently it's a new concept to a lot of people," Tyree said, with more than
a hint of sarcasm, "but in every single solitary private-equity fund, right after
their fundraising, values go down.
"Winners take a long time to develop. Losers occur quickly. The turmoil I
see is the normal course. It doesn't affect my judgment as to quality of Divine
at all. I think it's more healthy than the wildly optimistic valuations."
Joe Piscopo, a local angel investor and former tech entrepreneur, also
invested before the IPO at $6 per share, split-adjusted. Pre-IPO investors,
because they get in at a lower price, often make money even when the
public stock goes down. But in Divine's case, private investors are
underwater, too.
"I knew going in that Divine [required] a long-term perspective," he said. "As
an investor, I probably failed to take into account what would happen if the
market turned down."
He still hopes Divine will be good for the local tech community, but he said
he didn't invest to remedy Chicago's venture capital scarcity.
"I didn't make this investment to lose money," he said.