Unlucky Echelon of Ex-Centimillionaires Sees Stakes Plunge as Net Craze Fades
By SUSAN PULLIAM and SCOTT THURM
Staff Reporters of THE WALL STREET JOURNAL
At the age of 36, after a career toiling mostly as a mid-level engineer and
manager, Michael Donahue became a member of a very exclusive group:
the Internet centimillionaire club.
The founder of InterWorld Corp., a business-to-business company in New
York, Mr. Donahue saw his stake rise to $448 million last year as
InterWorld's share price skyrocketed after an initial public stock offering in
August 1999.
He then did what many red-blooded Americans would have done: He
splurged, big time.
Mr. Donahue bought a $9.6 million second home in Palm Beach, Fla. A
polo enthusiast, he ponied up $100,000 to help sponsor his own team
there. He spent a bundle more sharing in the rental of a Hawker Sidley
private jet, the better to whisk off to Palm Beach on weekend jaunts with
his wife. "It was a lifestyle thing," he explains.
Another Club
Today, Mr. Donahue is a member of another club -- call it the 90% club --
of executives whose companies' stock price has fallen that much or more
from their peak.
The value of his InterWorld stake has plunged to $12.6 million, as the
share price has fallen 96.8% to $2.94 from a peak of $93.50 on Dec. 31.
He was asked to repay part of a $14 million loan he took out with his
InterWorld stock as collateral. And the Palm Beach house? To help satisfy
his lenders, he has put it on the market for more than $13 million. "Going
up was easy. But when it starts going down, no one wants to talk to you,"
he says. "It's been the most challenging personal experience of my career."
A Lesson in Market Value
Major individual shareholders at some of the companies that have seen stock
prices decline 90% or more.
VALUE OF HOLDINGS
COMPANY
INDIVIDUAL
CURRENT
AT STOCK'S
PEAK*
ICG
Communications
Shelby Bryan,
CEO
$559,170
$87,789,612
US Interactive
Eric Pulier,
chairman
3,928,484
296,246,348
Ventro
David Perry,
CEO
10,251,573
420,245,449
Mediaplex
Gregory R.
Raifman, CEO
18,860,358
714,156,029
Neoforma.com
Robert J. Zollars,
CEO
11,788,819
412,608,656
InterWorld
Michael
Donahue,
chairman
12,553,800
399,245,000
Stamps.com
Mohan Ananda,
director
5,383,386
192,823,108
National Info.
Consortium
Jeffrey Fraser,
chairman
83,233,494
2,142,644,400
Sciquest.com
Peyton
Anderson,
founder
2,840,105
75,650,828
Onvia.com
Glenn Ballman,
CEO
31,510,417
827,546,304
Webvan Group
Louis H.
Borders, founder
58,702,097
1,677,202,762
Lante
Mark Tebbe,
chairman
51,300,770
1,139,293,750
*Based on current total holdings, including shares held outright, vested and
unvested options.
Source: Birinyi Associates; First Call/Thomson Financial; WSJ Research
At least he has plenty of fellow sufferers. More than 60 companies -- most
of them start-ups that went public at the height of the Internet frenzy --
have seen their stock nosedive 90% or more. They include such
well-known names as eToys Inc., Webvan Group, Internet Capital Group
Inc., Ask Jeeves Inc. and Priceline.com Inc. All told, according to market
trackers Birinyi Associates, in Westport, Conn., about $114 billion in
market value has been erased among the 25 worst-performing Internet
stocks, which are down a staggering 95.7% on average from their highs
this year. Like so many Humpty Dumptys, executives of those companies
have had a truly great fall, with the combined losses of the largest
shareholder at each company adding up to about $14 billion.
Top of the Drop
Perhaps never before have so many been worth so much for so little time.
At the top of the 90% club is Shelby Bryan, a former Wall Street
investment banker who became chief executive of ICG Communications
Inc., a fiber-optic telecommunications company. Thanks to a 99.4%
decline in ICG's stock, to 25 cents from a peak of $39.25 in March, his
stake in ICG, once worth $89 million, is now valued at just $550,000.
Jeff Dachis, the brash co-founder and chief executive of Razorfish Inc., a
Web-strategy and design company, had stock and options worth $281
million at their peak. When the stock was riding high, Mr. Dachis was
quoted as saying, "There are sheep and there are shepherds, and I fancy
myself to be the latter." With his stake now valued at only $24.8 million,
Mr. Dachis is singing a different tune. "Anyone paying attention to short
swings in a volatile market has their eye on the wrong ball," he says.
Candice Carpenter, founder of iVillage Inc., a Web site for women, had a
stake once valued at over $100 million. It's now worth $890,000. Last
month, she was forced to sell a block of stock to satisfy demands from
Merrill Lynch & Co., which gave her a loan secured by her iVillage stock.
And then there's James Cramer, who founded TheStreet.com. His current
holdings, which once would have been valued at $235 million, are now
worth about $10.5 million with the stock down 95%.
'Try to Not Focus'
Peter Jackson, founder and chief executive of Intraware Inc., which sells
software over the Web, has seen the value of his stock shrink to roughly
$22.8 million from $340 million. At Mediaplex Inc., an online
marketing-services company, Chief Executive Greg Raiffman has watched
his stake plummet 96.8%, to just $20 million from more than $700 million.
"You try to put it out of your mind," he says. "You try to not focus on how
much has evaporated."
Most Americans can only wish they were so unlucky. Not one of these
Internet entrepreneurs is headed for the poorhouse. But there is more than
a little gloating over their diminished fortunes.
Let's be honest: Even while Internet founders were lauded as poster
people of the New Economy, they were also widely resented. Kevin
Marcus, a 26-year-old who helped found Internet software company
InfoSpace Inc., recalls being viewed "as some snotty kid." At a
neighborhood party he attended when InfoSpace stock was soaring --
pushing the value of his stock above $100 million -- a middle-aged man
asked him sarcastically , "You mean you could write me a check for $1
million today?"
InfoSpace executives were briefly in the 90% club, though a modest
recovery means the shares now are down just 86% from their peak. To
help ease the pain, Mr. Marcus has a new home, a Mercedes and a
Ferrari, with the help of cash from regular sales of some stock each
quarter.
The financial losses of the Internet nouveaux riches have created a wealth
of black humor. "B to B," the Web jargon for "business to business," has
become shorthand for "back to banking," the industry that some Internet
executives came from and now are returning to. The term "B to C," for
business-to-consumer Internet companies, now stands for "back to
consulting." And companies such as Internet Capital Group -- current
stock price $10.25, down 95.2% from its peak of $212 last December --
that were once referred to as "incubators," because they financed and
nurtured infant companies, are known as "incinerators."
Many of the fleetingly mega-rich were wealthy only on paper, because they
never sold a share of their company stake. In part, that's because so-called
lockup periods require most insiders to refrain from selling any stock for
six months after a company's IPO, to protect other investors from
concerns about executives bailing out at the first opportunity.
'Balata' and Backspin
Mr. Jackson of Intraware has coined a phrase for the company's seemingly
ever-shrinking stock price: the "balata," named after a golf-ball covering
that helps golfers put backspin on the ball, making it roll back toward the
golfer after landing on the green. But, he claims he has "not lost any sleep"
over his declining net worth. Who needs a multibillion-dollar valuation
anyway, he asks? "A year ago, money grew on trees. It makes you think
you can do anything. When money doesn't grow on trees a year later, you
become very focused on what your competency is," he says.
Glenn Ballman, the 29-year-old founder of Onvia.com Inc., a Web portal
for small businesses, also is publicly nonchalant about seeing his net worth
tank by a little less than $800 million. Mr. Ballman's personal net worth
soared to $827 million the day after the company's IPO in February, a
development he couldn't have foretold only a few years before when he
was traveling the world with "a pair of sandals, a T-shirt, a backpack,
shorts and a camera." To celebrate, Mr. Ballman treated five childhood
friends from tiny Wilcox in the Canadian province of Saskatchewan to
steak dinners in New York City.
Today, Onvia's shares trade at $2.97 and Mr. Ballman's stake is worth
about $31.5 million. "One day we didn't have a ticker [stock symbol]. The
next day [the stock] was in the 60s and 70s, and a few weeks later it was
in single digits," Mr. Ballman says. He wasn't able to sell any shares when
the stock was higher, but he says he doesn't need the cash because he
shares a Seattle house with three friends.
For others, even if their fortune was only on paper, losing much of it has
been painful.
"Jeepers. Don't make me think about it," says Matthew Szulick, chief
executive of Red Hat Inc., which offers services for the Linux operating
system. Its shares are down 90.5%. At one point last December, Mr.
Szulick's five million shares were worth $756 million. And now? About
$71.5 million. The lockup period prevented him from selling shares
anywhere near the peak.
Mr. Donahue of InterWorld was one of the biggest spenders among the
now not-so-rich Internet entrepreneurs. He founded the company six years
ago after working for PepsiCo and Citigroup, and then running his own
consulting company, never earning more than $200,000 a year in salary.
As InterWorld's stock soared, he cashed out few of his 4.8 million shares.
Although the lockup period had expired, he sold only several hundred
thousand shares, keeping the rest because of the bad publicity that can be
generated by insider sales by senior executives. Instead, he took out loans
to finance his jet-setting lifestyle, using his stock as collateral.
Mr. Donahue agonized over the precipitous decline of InterWorld's stock,
as it tumbled to $10 just before Memorial Day weekend. "I never believed
it would get to $10. I was incredulous that we were that low." That
weekend he skipped the trip to Palm Beach, working to concoct a plan to
shore up the company. "The lower the stock goes, you have a series of
events that begin happening and you are second-guessing yourself," he
says. "It's a painful process."
The shares perked up, getting back to the high $20s in July, before
descending even further. Things went from bad to worse for the company
in recent weeks when it told investors it would report a
wider-than-expected loss from operations. With the shares under $3, the
company hired Bear Stearns & Co. to explore strategic alternatives. On
Oct. 12, it announced that it had signed a pact with technology-holding
company Jackpot Enterprises for a $20 million private placement of
convertible preferred shares. As part of the agreement, Jackpot said it
would also assume Mr. Donahue's $14 million loan in exchange for some
of any future gains from his InterWorld stock.
Versailles -- With Golf Course
Another big loser in the tech-stock decline has been Michael Saylor, the
flamboyant founder of Internet software concern MicroStrategy Inc.,
based in Tysons Corner, Va. With its shares down 92% since their peak in
April, the value of Mr. Saylor's stake has plunged to $1.09 billion from
$14.3 billion.
When MicroStrategy's stock was still up, Mr. Saylor bought a 50-acre lot
on the banks of the Potomac River where he planned to build a mansion,
modeled after the Palace of Versailles, with a nine-hole golf course on the
grounds. Mr. Saylor declines to comment, but those plans are "on hold," a
spokesman says. He attributes the delay to demands on Mr. Saylor's time
rather than the decline in his net worth. "At the moment, neighbors' horses
are grazing on the land," the spokesman says.
Gone also are the lavish parties and events formerly bestowed on
MicroStrategy employees. Last year, MicroStrategy booked a Celebrity
line cruise ship and treated all 1,500 employees to a week in the
Caribbean at a cost of about $3 million, according to a person close to the
company. The company had booked the ship and rooms for another free
cruise this year, before MicroStrategy drifted into dire financial straits.
Now, employees will have to pay their own way -- $1,000 and up per
room, the spokesman says. "We're trying hard to get back to profitability,"
he explains. MicroStrategy was forced to restate its earnings earlier this
year after it disclosed in March that it had misstated earnings and revenue
for several years.
It isn't just the founders and top brass who have watched their
Internet-financed dreams fade. The boom in Internet stocks lured many
executives from older companies, with promises of potential wealth from
stock options.
A Surreal Spike
Peter Hutto, 41, left Electronic Data Systems Corp. in November 1999 to
head the Southern California office of Lante Corp., a Chicago-based
consulting firm for business-to-business companies. Though he walked
away from soon-to-vest stock options that would have been worth several
million dollars, it appeared initially that he had scored big by moving. Lante
went public at $20 a share in February, and jumped to $87.50 on Feb. 29,
making his stock worth many millions (though he won't say how many).
Since then, Lante's stock has plummeted to $3.94, making him worse off
than he would have been had he stayed at EDS.
Mr. Hutto calls the spike in the stock price "surreal." He adds: "I no more
believed that was going to last than I believe there's a man on the moon."
A mid-level executive who has seen his riches vanish is Jake Bramhall,
director of client services at the once-highflying Web consultancy US
Interactive Inc., based in Philadelphia. At the beginning of the year, when
the company's shares peaked at $90, his stock was worth more than $1
million on paper, and he took the occasion to go with his wife to check out
vacation homes at Point Pleasant, a beach town on the New Jersey shore.
Now, with US Interactive's shares trading at a mere $1.21, down 98.6%,
those plans are out the window. "The money we were using to buy it
disappeared, and it became a stupid thing to do," he says.
Mr. Bramhall says he did make $100,000 cashing out some of his shares.
"One day you're worth almost a million, another day it's gone," he says.
"Easy come, easy go, although we kick ourselves ... for not cashing out
more of them."
Now, he must also endure the ribbing of his in-laws and other relatives
who had also invested in the stock. "I get some teasing, but at the same
time I bought some [stock] of my father-in-law's company, Xerox, so to
hell with him," he laughs. Xerox Corp.'s shares are down 88% from their
1999 high of $63.94 a share.
Some executives are finding their celebrity status is diminishing along with
their net worth. No one has run up lately to Gordon Hoffstein, chief
executive of Internet marketing company Be Free Inc., like the woman
who had read about his company and who recognized him in a shoe store
last year. "She said, 'You have the golden touch. What's the name of your
stock? I want to buy it,' " says Mr. Hoffstein. His stock has sunk 93.5%
since its peak, causing the value of his stake to fall to $14.6 million from
$240 million at its peak. Mr. Hoffstein says he counseled the woman not to
buy the stock if that was the extent of her due diligence.
He says now, "If she liked the stock at $60, she ought to love it at $2."
-- Suein Hwang and Cassell Bryan-Low contributed to this article. |
