Viva Zapata

A fish-oil company is trying to become the Cinderella of the Internet ball by buying up small Web sites.

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Last May, in the middle of the night, officials at Excite Inc., the world’s second- largest Internet search and directory company, received a peculiar fax at its Redwood City, California, headquarters. The fax contained a $1.7 billion takeover bid from–of all things– a small fish-oil and fish-meal company based in Houston. Excite rebuffed the “friendly only” bid from Zapata Corp. with a chuckle, citing the “vast disparity” between the value of the two companies and the odd mix of businesses. There is “almost complete lack of synergy,” said Excite’s board, amused by the idea of being swallowed by Zapata.

Others laughed even louder. “What were they thinking?” asks a spokesperson for another Internet company. “It doesn’t make sense.” James Cramer, a hedge-fund manager, said in his online investment newsletter TheStreet.com., “[It] was a great PR stunt, in that millions of people who remembered this company as the old Zapata Offshore will no longer think of it as such.” He went on to question the sanity of Zapata’s president and CEO, Avie Glazer.

Critics question Zapata’s ability to remake itself into an Internet company. “It puzzles me,” says Tony Blenk, an analyst who follows the Internet sector for Everen Securities Inc., in Chicago. “If it’s a natural extension of your business, like retail, or information providers such as publishing companies, then it makes sense. But fish oil?” asks Blenk. “You have to ask what value you bring to your shareholders.”

Glazer, for one, is convinced he can bring a lot of value. Zapata has announced an ambitious plan to build one of the world’s largest Internet businesses. “If you get in early and move aggressively, there’s a tremendous opportunity in the Internet,” says Glazer. “We want to have a major presence there.” Since the failed bid for Excite, Zapata has announced plans to buy 31 Internet businesses, including online publications, Web “communities,” and electronic-commerce businesses.

Zapata isn’t the only company eyeing the Internet as the arena in which to make its fortune. The Walt Disney Co., for example, recently acquired a 43 percent stake in Infoseek Corp., an Internet portal and directory service firm based in Sunnyvale, California. And as long as the market continues to reward any company with “cyber” or “.com” in its name with lofty valuations, those with logical fits– and those without– will continue to be drawn to it, entering through acquisitions.

The Chameleon

It wouldn’t be the first time Zapata has changed its identity. The company was cofounded as an oil-exploration concern in 1953 by former President George Bush. But when the oil industry fell on hard times in the mid 1980s, Zapata moved into natural gas. The company switched gears again in the early ’90s, exiting the energy business completely. It retained a 40 percent stake in Envirodyne Industries Inc., a food packager in Chicago, and a 60 percent interest in Omega Protein Corp., a marine-protein operation in Houston. The Glazer family, headed by Avie’s father, Malcolm, a Florida real estate and broadcasting magnate, bought a majority stake in Zapata in 1994. The Glazers also own the Tampa Bay Buccaneers football team and have held interests in businesses as diverse as restaurants and television stations. “We’re used to going in new directions,” says Avie.

In July, Zapata again showed its chameleon nature when it announced its intention to split the company into two separate public entities. The old Zapata retained the fish- protein and food-packaging business. The Internet company was renamed Zap Corp. Wall Street welcomed the news. In one day, the heaviest day of trading in the company’s history, shares more than doubled, to $21.50. (Like other Internet companies, Zapata’s stock has been hurt recently by the turbulent market.)

Skeptics again saw the announcement as a ploy to capitalize on the hot Internet sector. After all, the largest Internet companies now have market caps in the billions of dollars, though many have scant revenues and few operate in the black. Glazer rebuffs the charge. “The valuations are what they are. It’s nice to see high valuations, but that’s not the impetus,” he maintains. “We have had our eye on the Internet sector for two years.”

Traditional manufacturing businesses have tried to recast themselves in the Internet mold in the past. In 1996, shares of Zenith Electronics soared from $7.13 to $22.88 when the then-78-year-old TV maker attached the Internet label to its identity. But the company’s plans to build interactive Internet televisions, called NetVision, never materialized. This spring, the company filed for bankruptcy, its shares nearly worthless.

One thing Zapata does bring to the table, however, is cash. Through the public offering of the company’s fish-protein business in April, Zapata reaped more than $100 million. “When we looked at what to do with the proceeds, we identified the Internet as an area with tremendous opportunity,” says Glazer.

When Zapata set out to select its acquisitions, it decided to pursue a roll-up strategy, consolidating small, private Internet businesses (see “High Rollers” April). “I want to be the Wayne Huzienga of the Internet,” says Glazer. Huzienga made a name for himself consolidating small waste companies into Waste Management Corp., and then did the same for video rentals by creating Blockbuster Video.

Zapata placed ads in the Wall Street Journal and the New York Times that read, simply, “We will buy your Internet site.” The response was overwhelming. More than 1,000 business plans poured in. So far, the agreements that Zapata has made to acquire businesses have been letters of intent. The companies will be purchased mostly with Zap stock, preserving Zap’s cash, when it is split from Zapata in a spin-off or an IPO. Zapata has retained Salomon Smith Barney to assist the company with evaluating its options.

Some of the acquisitions include Starting Point, an Internet directory; ChatPlanet, a community of chat networks; and BiancaTroll Productions Inc., which calls itself an alternative Internet community. “We’re looking for sites that are unique,” says Glazer. “Anyone can do news, sports, and weather.” The strategy that Zap is pursuing is to provide a portal-type service, like Yahoo! or Lycos, but also to own the content providers the Internet users are looking for. “Those sites send people elsewhere; we want to be the beginning and end destination,” says Glazer. While the idea has merit– remember, content is king–it’s not easy to pull off. Microsoft Corp. has spent millions and what seems like eons in Internet time trying to pursue a similar strategy, and it has had only modest success.

In early August, Zapata landed its biggest acquisition yet when it agreed to acquire Attitude Network Ltd., a respected Web-site publisher with more than 2 million users. It will also give Zapata some badly needed management expertise. Glazer intends to make the Attitude management the core of Zap, answering criticism of his own lack of Internet experience. “They have a very well- regarded management team,” he says. But while the management of Attitude has done fine running a private company with six Web sites, it is uncertain how well it will fare running the operations of a public company whose major business is to buy Web sites that are nearly impossible to value.

As if building one of the nation’s largest Internet companies is not enough of a challenge, Glazer also wants to do something few large Internet companies have been able to do: earn profits immediately. Glazer claims he can accomplish this by carefully restricting his acquisitions to companies that are already making money on the Net. “There is this attitude that Internet companies don’t need to make money right now,” argues Glazer. “They say, ‘Nobody expects us to, so why should we?'”

Zapata’s acquisitions include Web sites that appeal to a widely divergent audience. Although that will give the company a high number of “unique users,” an important metric in valuing Internet sites, it won’t offer Zapata much in the way of synergy, a key to any roll-up strategy. Bringing together a large number of Web businesses will not add much value if there is little cross- pollination and synergy in the promotion of the sites. The “something for everyone” route Zapata has taken could lead to a hard-to- manage group of disjointed businesses.

Then there’s the timing issue. Companies including Yahoo, Excite, Lycos, and Infoseek have a few years’ head start on Zapata. In the rapidly moving Internet sector, one year is like a decade. “The window of opportunity is probably closed, unless you’re willing to make an immense financial commitment,” says Henry Blodget, a senior analyst who follows the Internet sector for CIBC Oppenheimer Corp. “And even then, there’s a high risk of failure.”

But don’t count Zapata out yet. In the short time the company has set its sights on the Internet, it has showed a great ability to learn from its mistakes. And though some may scoff at Zapata’s fishy origins, it could soon make people forget it was ever anything but an Internet company. “They think we’re nuts,” says Glazer, “but we don’t get offended, and we don’t get deterred.”

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