When fish-processing firm Zapata announced on Monday its intention of becoming one of the 10 largest Internet companies, the only thing that could drown out the laughter of know-it-all Net insiders was the roar of the market, which sent the company's stock up over 115 percent, from US$9.88 to $21.25.
The fish meal and sausage casing company, which in May made an unsuccessful $1.7 billion bid for Excite, said it will acquire 21 Web sites and ecommerce businesses, integrate them into its Zap site, and become another Yahoo. Part two of the plan is to spin off Zap, Zapata's Internet subsidiary, before year's end and likely take the company public.
"It does make you laugh," said Greg Vogel, analyst at NationsBanc Montgomery Securities, who met the news with guffaws. "It's an interesting attempt to build a media company by rolling up a whole bunch of small, probably unprofitable Web content, but we haven't seen that to be successful for anybody out there yet."
Neil Weintraut, a principal at the venture capital firm 21st Centure Internet, also noted the amusement with which the news was received. Still, he said, "I do give them credit, that given they're a pre-Internet or industrial-era company, they're making a serious play for the Internet."
Weintraut added that it would be "extremely difficult to gain a foothold against AOL (AOL), Yahoo (YHOO), Netscape (NSCP), Lycos (LCOS), and the portals."
To hear Zapata (ZAP) president and CEO Avie Glazer tell it, he wouldn't even want to be compared with the others. "They're building other people's brands that in the future they're not going to benefit from," he said.
Zap, in contrast, would own the feature sites. Viewers would not jump off to other sites, so Zap would get all the advertising money.
The concept has its merits, but the network of second or third-tier sites Zap is pulling together will need some heavy promotion to generate the kind of traffic that will make it viable.
The targeted sites include online book and music retailers, chat communities, and financial information finders. The base would be the search engine Starting Point. Other highlights include ChatPlanet; Daily Stocks and StockSheet, research sites for tracking stocks and mutual funds; Travel Page for booking trips; as well as Galt Shareware Zone, Freeware32, LatinoLink, Retro, Virtual Technology, ComFind, Planet, Rock Mall, Clip Art Connection, Bibliofind, Mass Music, and the previously announced acquisitions Word and Charged.
Zap claimed that the 21 sites combined would have an audience that would place it among the top-10 most-visited Web sites. But none of the individual sites -- save one -- was big enough to show up on any Web traffic survey. The one exception, Starting Point, was number 704 on last month's list of 806 Web sites visited by participants in the RelevantKnowledge survey.
Glazer was tight-lipped in an interview about how he would make Zap a top contender. He declined to say how many people work on Zap ("a relatively small staff, we're ramping up"), who with Internet experience is among the managerial ranks ("probably people you don't know -- but what did anybody know about the Net two years ago?"), how much cash or stock it would cost to acquire any of the sites with which Zapata has signed letters of intent, how much would be spent on promoting the sites, or when the acquisitions would be complete.
Glazer did say Zapata already has $100 million in cash, generated from its fish meal and sausage casing business. The Houston company, cofounded in 1953 by former President George Bush, reported a net income of $15.4 million on revenues of $118 million in 1997. Its 1996 numbers weren't bad either, much better than most Internet companies, in fact. It had a net income of $7 million on revenues of $93 million.
In addition to its decision to split the Internet business from the marine protein business later this year, the Zapata board of directors said it is interested in buying back some 5 million shares. (Too bad they didn't do it before today's incredible run-up.)
The company currently has more than 23 million shares outstanding, worth a total of $493 million at Monday's close. In 1984 the stock price hit $100, but it has since dipped to the single digits and has generally traded below $10 since 1991.
Glazer said all the sites have great user loyalty and most are profitable. How then to explain that at least some of the sites Zap is acquiring were looking for a savior and responded to Zapata's "Zap will buy your Web site" ad campaign in The New York Times, Wall Street Journal, and other newspaper business sections?
"I approached them," said Lavonne Luquis, cofounder and president of the Hispanic news and community site LatinoLink, who saw one of the ads in the San Francisco Chronicle.
"We've been bootstrapping for three years now. It's always been month-to-month, quarter-to-quarter," she said. Luquis added that she hoped the acquisition would give the site, which can't afford to advertise, a bit more financial stability and help it to grow. The sites Word and Charged had become a financial burden and were being closed down by their parent, Icon CMT, before Zapata spared them from death in April.
Allen Weiner, an analyst at Dataquest in San Jose, California, said Zap's strategy could make sense. "I think they're betting on the traditional thought of venture capitalists. They're probably not paying top dollar for these sites, and they only need one or two of the pack of 20 to take off," he said.
But that doesn't sound like what Glazer has in mind. "Our goal is to make Zap a household name. We'll do whatever it takes," he said, although, you shouldn't expect to see Zapata running into to debt to do it.
"Our company isn't going to have a burn rate," said Glazer, "It's going to have a profit rate."
