PAIR 5: CMGI AND CGI
The year 2000 started off with a bang for CMGI, Inc., as the stock hit
$163.22 on January 3—a gain of 1,126% over its price just one year
before. The company, an “Internet incubator,” financed and acquired
start-up firms in a variety of online businesses—among them such early
stars as theglobe.com and Lycos.^10
In fiscal year 1998, as its stock rose from 98 cents to $8.52,
CMGI spent $53.8 million acquiring whole or partial stakes in Internet
companies. In fiscal year 1999, as its stock shot from $8.52 to
$46.09, CMGI shelled out $104.7 million. And in the last five months
of 1999, as its shares zoomed up to $138.44, CMGI spent $4.1 bil-
lion on acquisitions. Virtually all the “money” was CMGI’s own pri-
vately-minted currency: its common stock, now valued at a total of
more than $40 billion.
It was a kind of magical money merry-go-round. The higher CMGI’s
own stock went, the more it could afford to buy. The more CMGI
could afford to buy, the higher its stock went. First stocks would go up
on the rumor that CMGI might buy them; then, once CMGI acquired
them, its own stock would go up because it owned them. No one
cared that CMGI had lost $127 million on its operations in the latest
fiscal year.
Down in Webster, Massachusetts, less than 70 miles southwest of
CMGI’s headquarters in Andover, sits the main office of Commerce
Group, Inc. CGI was everything CMGI was not: Offering automobile
insurance, mainly to drivers in Massachusetts, it was a cold stock in an
old industry. Its shares lost 23% in 1999—although its net income, at
$89 million, ended up falling only 7% below 1998’s level. CGI even
paid a dividend of more than 4% (CMGI paid none). With a total mar-
ket value of $870 million, CGI stock was trading at less than 10 times
what the company would earn for 1999.
And then, quite suddenly, everything went into reverse. CMGI’s
magical money merry-go-round screeched to a halt: Its dot-com
Commentary on Chapter 18 481(^10) CMGI began corporate life as College Marketing Group, which sold infor-
mation about college professors and courses to academic publishers—a
business that bore a faint but disturbing similarity to National Student Mar-
keting, discussed by Graham on p. 235.