ICG's Salvage Operation
By Akweli Parker
Inquirer Staff Writer
As tech-stock mania crashed to an end in 2001, Wayne-based Internet Capital Group - a holding company for a bevy of dot-coms - was drowning in $500 million of debt while the firms in its portfolio voraciously gobbled through cash.
It was a nightmare compared with 2000, when the company was hailed by the business media as one of the "darlings of the Internet."
"We knew it wasn't real," ICG's cofounder, chairman and chief executive officer, Walter W. "Buck" Buckley III, said of his and other companies' boom-time stock valuations, which came plummeting back to earth once investors caught on, too.
"It was like being in a MASH unit," said Douglas A. Alexander, managing director of operations and a principal at the company since 1997.
"We had to make life-and-death choices about companies" in order to save ICG, he said.
The patient did survive. ICG officials quietly celebrated the firm's 10th anniversary last month.
Executives say that for its "return" act, the company will ride the next big wave in software, a category called "on-demand."
"We see a lot of upside on the horizon," Alexander said. "On-demand is the future of software."
On-demand simply means that customers access the software by going online, rather than using a program that was installed on their PC or in their building. Several firms, most notably Salesforce.com, based in San Francisco, have carved a niche in the on-demand sector, which makes up 4 percent of all business software sold today.
"I think it definitely is growing," said Liz Herbert, an analyst with Forrester Research Inc.
Research firm International Data Corp. gets more specific, saying the on-demand model will account for nearly a third of all software in use by the end of the year and revenue will reach $10.7 billion by 2009.
It's not exactly a new idea. In the late '90s, the concept gained a measure of geeky popularity under the less-sexy name "application service provider."
Michael D. Zisman, ICG's managing director of operations, worked at IBM in 2002 when, he says, that firm coined the term "on-demand" to describe the model.
"I was amazed to see how it took off," Zisman said.
"In today's world, it doesn't make sense to license, install, blah, blah, blah" - in other words, the usual way companies and individuals buy software, Zisman said.
There are some concerns about on-demand. If the provider's data center goes down because of a hurricane, terrorist attack or hacker break-in, customers who connect to the center to use their applications are out of luck.
Because on-demand uses the Internet, cyber-security is a worry.
And it isn't for everybody. Companies with more than 1,000 employees often find the software unsuitable because they require more customization.
"It's the midmarket that's the real sweet spot for software as a service," Forrester's Herbert said.
She said customers would likely have worries about reliability, speed and security, problems all magnified because of the Internet.
Salesforce.com, for instance, suffered several service outages within the last year, outraging customers that had to send their sales teams home on the outage days.
Nonetheless, the space is starting to get crowded with competitors.
Besides Salesforce.com, a host of other small to medium-size firms, including Hyperion Solutions Corp. and Oracle-owned PeopleSoft Inc., are developing on-demand products. SAP AG, which has its North and South American headquarters in Newtown Square, announced a Web version of its popular customer relationship management software this year. Microsoft Corp. plans to get in the game with Windows Live and Office Live.
Consumers, too, can get a taste of on-demand software via spreadsheet and word-processing applications offered for free by Google Inc.
On-demand, Web-based software, and software-as-a-service - all interchangeable terms - cut costs by automating routine processes.
Philadelphia-based StarCite Inc., 61 percent-owned by ICG, epitomizes the genre.
"Say you're a meeting planner" at a company, Buckley said.
"You say, 'I want golf, I want to train 100 people in Phoenix, and I want to set up each individual's needs, car, hotel, etc.' "
Instead of endless faxes and phone calls with airlines and hotels and other minutiae, the corporate travel person simply enters all the requirements - flight times, room requirements and the like - into the on-demand StarCite system, which handles the rest.
Unlike many of the convoluted schemes hatched during the dot-com boom, ICG's "partner companies" have revenue. Last year, its eight core companies posted revenue of $189.7 million, a 23 percent increase over 2004. The company says it expects about 20 percent revenue growth this year.
While ICG's Icarian rise and fall came to symbolize the "irrational exuberance" of the dot-com era, company officials insist they had the right basic concept.
"We made mistakes," Buckley said. "People grew too quickly and their overhead was too large."
Still, he said, "We never lost faith in the overall idea... that the Internet was going to change everything."
"There was a tendency back then for just about everything to be overhyped," said Scott Testa, chief operating officer for Norristown-based Mindbridge Software Inc., which makes on-demand intranet software for the financial services, engineering, medical and other industries.
Testa said he doesn't worry about ICG's firms and others jostling with Mindbridge for on-demand market share.
If anything, he said, "it justifies the business model we've been talking about the past five years.
"That direction they're going makes a lot of sense... . These companies are outsourcing manufacturing, outsourcing payroll, outsourcing H.R.
"Why not outsource IT infrastructure?"
ICG has been showing signs that its strategy might be working. While its stock price continues to languish in the $8 range, it has flirted with profitability, showing net income of $72.5 million for 2005; for the first quarter of 2006, however, it posted a loss of $4.9 million, or 13 cents a share. The company is sitting on a $148 million cash pile and has $89 million in debt.
Officials say the company intends to make two to four acquisitions a year.
ICG last year trumpeted its first acquisition since 2001, with the purchase of a 39 percent stake in WhiteFence, a consumer comparison-shopping service.
Since then, ICG has bought a stake in VCommerce Corp. of Scottsdale, Ariz. That firm sets up e-commerce sites for retailers such as Target and receives a small payment for each online transaction processed.
It was "a watershed event" for ICG to start buying stakes in companies again, said Paul Slaats, ICG's chief dealmaker until he left in 2001. He returned last year at Buckley's invitation.
"ICG was flying very below the radar between 2001 and 2004," Slaats said.
While the prospects for ICG's strategy look promising, Slaats tempers his enthusiasm: "The right time to be elated about a deal is not when you go in... . It's about seven or eight years in, when the deal produces great returns for investors."
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Contact staff writer Akweli Parker at 215-854-5986 or aparker@phillynews.com.
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