Follow The Money
Be Intuit-ive, Sell General Magic Intuit's darkest hour arrived May 20 when Bill Gates called off Microsoft's US$2 billion purchase of Intuit, courtesy of the antitrust division of the US Justice Department. The following Monday, Intuit's stock dropped to $62 per share, down a whopping $15 from the preceding week.
Despite its recent misfortunes, Intuit is still a great buy. The company offers an array of products and services that have high brand value and provide recurring revenue streams. It is run by an experienced management team that really understands its customers. And think about it: Intuit is still a very attractive buy for any other company with $2 billion to spend.
I predict Intuit will be bought by a big financial institution like BankAmerica, or even by a smaller player like Charles Schwab & Co. Inc. Both companies would be perfect complements to Intuit's financial software. Another possible acquirer is AT&T, which was shivering in its loafers at the consequences of a Microsoft/Intuit power merger. AT&T might even feel relieved enough to consider cutting Intuit a big check.
As a side note, Intuit CEO Bill Campbell has probably suffered most from the blown deal. He joined Intuit late in the game and probably had the most expensive stock options of anyone. True, Intuit founder and chair Scott Cook is down about $180 million, but it looks like he has at least another $250 million to play with.
Black Magic That's the upside for the month – now for the downside. At the time of this writing, Sunnyvale-based General Magic, whose MagicCap operating system is used in both Sony and Motorola's PDAs, has seen its stock drop to $11 per share after hitting a $32 high on February 10 – its first day of public trading. As far as I can tell, the company went public because three of its primary partners – Motorola, AT&T, and Apple – lost their appetites for pumping more cash into a dreamy project – one that Magic CEO and chair Marc Porat admits won't see profits until the end of the decade. One reason for this corporate queasiness, I suspect, is grounded in the fact that the individuals who were General Magic's primary advocates have moved on. George Fisher from Motorola left to take over as CEO at Eastman Kodak; Bob Kavner of AT&T headed west and landed at Creative Artists Agency; and John Sculley from Apple passed Kavner in flight, to set up his own investment agency in New York City.
Conventional wisdom says the PDA market won't be viable until after General Magic burns through the $82 million it raised in its IPO. Industry insiders are predicting that the next Newton – due out at the end of this year – will sell only 100,000 units, and that you won't see PDAs of any kind move a million units until 1999. The wireless communications and semiconductor technologies required to make PDAs cheap enough, small enough, and useful enough are simply not in place yet. My advice to Porat is to develop a plan to cut General Magic's overhead by half. The company needs to focus 100 percent on finishing research and development on those products most likely to offer a fast path to healthy revenues. Magic should also go back to its existing partners and raise another $40 million or so now – this way, financial necessity won't force them into questionable deals. Until then, I'll be shorting General Magic stock.
Entrée Anyone? America Online has been taking steps to combat market-position assaults by Goliaths like Microsoft. AOL is currently gobbling up private technology companies that produce multimedia tools and services likely to help it stay differentiated. AOL's most recent entrée was San Mateo-based Medior. Apparently, the company has the technology to help AOL enhance its online publishing tools. Insiders estimate AOL paid a total of $31.3 million for Medior, which is owned primarily by its founders and sole VC investor Draper Associates (415/599 9000).
In the private company market, the most noteworthy acquisition was the dramatic $140 million purchase of Mountain View-based Centillion Networks by Bay Networks in San Jose. Dramatic indeed, since Centillion – an ATM and token ring-switching company backed by California VCs Accel Partners (415/989 5656), Sequoia Capital (415/854 3927), and Institutional Venture Partners (415/854 0132) – was operating at a meager annual revenue of $4 million. I recently ran into Doug Leone of Sequoia Capital and asked him about the deal. Leone explained that it was an offer Centillion couldn't refuse, even though there was remorse attached to the sale. After all, it was a rapidly growing company with hot switching technology. Accel's Jim Breyer and Venture Partner's Geoff Yang are also reported to be wallowing in cash-laden remorse.
It's said that 3DO's Trip Hawkins is shopping his company to various Japanese manufacturers like Panasonic and Sony. Just in case the Japanese decide to pay way too much for 3DO (as they did for California real estate in the early '80s), I'm going to cover my short position in the company. And as expected, Netcom's stock dropped from 27 1/2 to 22 1/2, so I'm covering half of my short to purchase Intuit stock.
The Wired Interactive Technology Fund (TWIT$)
Company Primary Business Symbol Shares Price Apr.3 Action
| Brøderbund Software | CD-ROM sw | BROD | 1,100 | 43 5/8 | – 8 5/8 | hold
| The 3DO Company | Games hd/sw | THDO | 3,000 | 11 3/4 | – 1 11/16 | cover
| Silicon Graphics Inc. | Multimedia hw | SGI | 2,700 | 39 1/4 | + 1 3/8 | hold
| Wavefront Technologies Inc. | Multimedia sw | WAVE | 5,200 | 19 | + 1 1/2 | hold
| Mobile Telecom Technologies Corp. | Mobile computing | MTEL | 3,300 | 22 3/8 | – 1 1/8 | hold
| Motorola Inc. | Communications/hw | MOT | 1,600 | 61 1/8 | + 4 3/4 | hold
| Cisco Systems Inc. | Connectivity | CSCO | 2,500 | 44 15/16 | + 5 9/16 | hold
| Microsoft Corp. | Software | MSFT | 500 | 84 1/8 | + 2 | hold short
| Apple Computer Inc. | Hw/sw | AAPL | 6,000 | 42 3/16 | + 3 15/16 | hold
| Oracle Systems Corporation | Database sw | ORCL | 6,000 | 35 5/8 | + 5 9/16 | hold
| NETCOM Online Comm.Service Inc. | Internet provider | NETC | 30,000 | 22 1/2 | – 1 1/2 | cover 15,000
| ADC Telecommunications | Digital access network | ADCT | 4,000 | 30 1/4 | – 2 5/8 | hold
| Global Village Communications Inc. | Communications hw/sw | GVIL | 3,800 | 13 3/4 | – 3/8 | hold
New Stocks
| Intuit, Inc. | Financial sw | INTU | 1,200 | 63 3/4 | buy
| General Magic Inc. | PDA sw | GMGC | 4,500 | 11 | short
Portfolio Value $1,317,962.50 (+31.80% overall) +9.67%
Legend: This fund started with US$1 million on Dec. 1,1994. We are trading on a monthly basis, so profits and losses will be reflected monthly,and profits reinvested in the fund or new stocks.
Information provided here is based on a combination of public data, professional insights, and street gossip overheard while: attending Prince Albert's World Music Awards dinner in Monaco; eating oatmeal and straw-berries at Il Fornaio; and wandering the halls at the E3 trade show. The TWIT$ fund is a model established by Wired, not an official traded portfolio. Wired readers who use this information for investment decisions do so at their own risk.
Anthony B. Perkins (tony@herring.com) is editor and publisher of The Red Herring (http://www.herring.com), a monthly investment magazine published in San Francisco.
