CMGI’s Success Could Spur Regulation
Even the best investments can have unfortunate side effects.
CMGI Inc. has enjoyed such big gains on its Internet stock holdings that it could face regulation as a mutual fund, analysts say.
Shares of the Internet venture-fund company rocketed 31% on Monday on expectations that two companies it has invested in will sell shares to the public later this year. CMGI stock zoomed $47.50 to a record high of $199.69 in Nasdaq trading.
The company said recently that it expects NaviSite and Silknet to go public. Those stock offerings should produce a windfall for CMGI, if the Internet craze continues.
Andover, Mass.-based CMGI acquired stakes in Lycos Inc. and GeoCities before those online companies went public. But now that both stocks have soared, CMGI says its investments may comprise more than 40% of its total assets--a legal threshold that would require the company to register as a mutual fund.
That’s something no operating company wants, because mutual fund regulations impose many restrictions other companies don’t have to face.
CMGI’s board has instructed management to cure the problem during a one-year grace period provided by law. To do that, CMGI may have to shed some of its stakes in Lycos or GeoCities--or shed the shares it will get in place of Lycos and GeoCities, if, as planned, the former is acquired by USA Networks, and the latter by Yahoo.
“Selling the assets is one obvious solution,” said Bill Williams, CMGI’s general counsel. “We aren’t an investment company,” he said, “and it will be relatively easy for us to stay out of that predicament.”
Stock sales by Net-related companies have been the hottest new issues in recent months. Last month, online service Prodigy Communications Corp. saw its shares more than double in its first day of trading, while business-to-business World Wide Web site company VerticalNet Inc. saw its stock almost triple in its first day of trading.
While CMGI provides venture capital to new companies and owns stakes in more than 35 businesses, management does not consider the company to be an investment fund. Rather, CMGI said it has created an Internet “family” of companies either by forming businesses or taking stakes in small companies it thinks will bear fruit.
“The Internet industry is moving at such a fast pace and companies are all experiencing the same types of problems,” said Ken Winston, an analyst at the brokerage Needham & Co. “Typically all these CMGI companies have experience with these problems and they help each other.”
