This P.R. 'Pirouette' Reveals the Ills Plaguing Dot-Coms.

An instructive bit of stock price propaganda issued forth the other day from a company that, until recently, needed no such artifice to lift its shares: Andover, Mass.-based CMGI Inc., the dot-com world's first -- and certainly the most successful -- "Internet incubator."

We will get to what "Internet incubator" companies are all about in a minute. But first let us attend to the accumulating evidence that being one is apparently not all that it once was.

In CMGI's case, one need look no further than the company's stock price, which has fallen 71 percent this year, leading to the aforementioned announcement that CMGI would, in effect, be reorganizing itself away from the incubating business and into that newest of new-new things to sweep the dot-com world: the business of making actual "operating profits" for the shareholders.

Now, the thing I find most instructive about all this -- this price-pumping "news" from CMGI, whose stock had risen an almost incomprehensible 85,000 percent in the six years ended Dec. 31 and is now suddenly falling apart -- is not simply how anxious the company has now become to stop the slide that has taken back almost three quarters of that run-up in just the last eight months. Rather, it is how CMGI's public relations pirouette from "incubator" to "operating company" lays so effortlessly bare for all to see, the essential baloney at the core of the company... and indeed, at the core of much of-the dot-corn space itself.

Dot-com commonalities

The truth of the matter is, CMGI is not a real company... which is to say, a business incorporated to make something that people really want to buy, then sell it to them at a profitable price that people are actually willing to pay. And neither, for that matter, is MyPoints.com Inc., or Theglobe.com Inc., or Beyond.com Corp. or a hundred other companies just like them.

None of them were companies created to make money from their products or services. In fact, it would seem, none of them ever expected to make any money at all. They were all ushered into being simply to make money from their stock price.

Now what, you may well ask, is an Internet incubator anyway, and why, after so many years of triumph in describing itself that way, is CMGI now suddenly trying to put as much distance as possible between itself and the concept? Well, simply put, an Internet incubator is a cute-sounding name for what amounts to a publicly traded venture capital fund for dot-com startups. A year ago, being such a thing was the equivalent of being Ricky Martin at a sleepover party of 15-year-old girls. Today, it's like showing up at the sleepover covered with leaking body sores.

CMGI didn't begin life as an Internet incubator, it just kind of stumbled into it. Initially, the company did nothing more than provide direct marketers with college mailing lists and other junk (hence the original name of the outfit: College Marketing Group.) But CEO David Wetherell, who took over the business and renamed it CMG Information Services Inc. back in 1986, was smart enough to see by the mid-1990s that the Internet would eventually develop into a whole new way of marketing almost any information-based product or service. So, in 1994 he developed some Internet-friendly software for the publishing industry, sold it to America Online Inc. for $36 million, and began plowing the proceeds into other Internet-based projects.

By 1998, the company held positions in a whole range of Internet companies, from Lycos Inc. and GeoCities, to Mother Nature's General Store Inc., to Reel.com Inc., to Amazon.com Inc., to Hollywood Entertainment Corp., and many, many more. Some were companies in which CMGI had been an original investor, some were companies that had not yet gone public (and ultimately. never did), and some were companies in which CMGI wound up acquiring shares.

Where are the profits?

At no time during any of this did CMGI ever pound the table about its plans to turn an operating profit from running the businesses it was "incubating." And neither did the analysts give the slightest indication of expecting as much.

So, what is CMGI now really worth? A June report by CIBC World Markets, when the shares were still trading at about $60, put a "strong buy" on the stock, based not on the market value of the company's assets but on its going-concern value as an operating company, and set a "near-term target price" of as much as $100 a share. The 33 percent slide in the stock since then suggests the valuation of the company as an operating business just wasn't very persuasive.

Add them all up and the company's portfolio of public stocks would look, as of this writing, to be worth no more than about $6 billion, With CMGI now being valued on Wall Street at just under $13 billion, the market is saying that when you back out the public stocks, all the rest of the business -- the whole incubating rigmarole -- is itself worth the other $7 billion. Is it? Is this hodge-podge collection of businesses, which has generated a grand total of $550 million of revenue in its latest 12 months, while racking up more than $1.4 billion in operating losses, worth much of anything at all?

There is no way to know until the-company tries to sell some of it in an IPO (Alta Vista Co., for example), or actually starts making money off their operations in the meantime.

Unfortunately, neither CMGI nor its shareholders have an infinite amount of time to find out. The company's chief financial officer, Andrew Hajducky, was quoted recently as telling reporters that CMGI currently has balance sheet cash and marketable securities of $1.75 billion. But the company has been burning through cash for its operations at a rate that now looks to be running in excess of $650 million a year.

My own guess is that investors won't be willing to stick around and wait for either outcome and that this is one stock whose best days are now behind it, permanently. We'll- see.

Christopher Byron is a columnist with Bloomberg News.