VerticalNet CEO: We're just like Ariba, Commerce One
December 20, 2000 08:31 AM PT
by Adam Feuerstein
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VerticalNet (VERT) is singing a new tune on the Street: We're a software company, dammit.
The troubled b-to-b Internet company revealed a "new" turnaround strategy Tuesday that steals a page from the successful Ariba (ARBA) and Commerce One (CMRC) playbook -- if you make money by selling high-margin b-to-b software, investors will love you.
Or at the very least, investors won't regard with you the same affection given to a week-old piece of fish, which is how VerticalNet and other b-to-b marketplace operators are being treated these days.
In case you haven't noticed, VerticalNet closed Tuesday trading at $5.38, or 96 percent off its 52-week high of $148.38. It was up a few pennies in trading this morning.
Selling NECX
That pretty much explains Tuesday's big news: VerticalNet is selling NECX, its brokerage for electronic components, to Converge, an industry-sponsored marketplace for the electronics industry. Closely held Converge changed its name from eHitex Tuesday and counts Hewlett-Packard (HWP), AMD (AMD), Compaq (CPQ), Solectron (SLR), Hitachi (HIT) and others as founding members.
In exchange for NECX -- the company's biggest revenue generator -- VerticalNet gets $60 million in cash and a 19.9 percent stake in Converge. In a separate agreement, Converge also will pay VerticalNet $107.5 million over three years for software to build Converge's online trading platform. The software will come from VerticalNet Solutions, the company's b-to-b technology division.
In other words, VerticalNet just landed a big software deal to power a large, industry-sponsored marketplace -- the kind of deal that made Ariba and Commerce One famous.
Eyeing Ariba, Commerce One
And while b-to-b stocks aren't exactly setting the Nasdaq on fire, VerticalNet CEO Joe Galli will be a lot happier if his company is mentioned in the same breath as Ariba and Commerce One, which are down only 67 percent and 81 percent, respectively, from their 52-week lows. Better yet, you still can measure their market caps with a "B" as in billions, while VerticalNet's market valuation is a measly $470 million.
"This deal is a blockbuster victory for us because it allows VerticalNet to grow a high-margin software business," said Galli. "Converge is going to be a showcase of our technology that will encourage other industry consortium marketplaces to choose us as their trading platform."
That means a lot more software license revenue moving forward, he says, which will force investors and analysts to take another look at VerticalNet.
"VerticalNet is not valued fairly from a technology standpoint," Galli continued. "We have a tremendous headstart with our b-to-b technology and software, and we're not getting any credit for it."
The sale of NECX took the market by surprise because NECX was VerticalNet's golden goose, responsible for 53 percent of the company's revenue in the third quarter. The unit, which brokers trading in 180 electronic product categories for more than 2,000 customers, is a major player in the spot market for electronic and high-tech components. With the sale of NECX to Converge, that revenue now will disappear off VerticalNet's financial statement.
But NECX was also an albatross around VerticalNet's neck because a majority of its trading was conducted offline, by fax or phone. During the third quarter, only 3 percent of NECX's revenue was derived from online trading, a statistic some analysts used to knock VerticalNet as a b-to-b poseur.
VerticalNet executives insist NECX was making great strides to move its trading online, with the help of its VerticalNet Solutions subsidiary. Expectations for the fourth quarter called for NECX to conduct 25 percent of its trades over the Net.
Was it close to meeting that goal? VerticalNet executives haven't said, and with the sale of the unit to Converge, they don't have to. But talk of an economic slowdown, and a rash of profit and revenue warnings from the electronics and computer sectors couldn't have been healthy for NECX's business, which may have been a contributing factor in the decision to sell the unit.
Huge equity stake
In exchange for NECX, VerticalNet gets a huge equity stake in Converge. At 19.9 percent, VerticalNet becomes the marketplace's largest shareholder, but at what value? VerticalNet and Converge executives are not discussing the value of their deal, and since Converge is still a private company, it's impossible to determine just how much that stake is worth.
Converge CEO Bob Lewis says an initial public offering is in the plans for the future, and he believes Converge will rank with Covisint, the automotive exchange, as one of the largest b-to-b marketplaces in operation. But successful IPOs are not a sure thing anymore -- and none of the dozens of industry-sponsored marketplaces have yet taken on Wall Street -- so there is no way now to determine whether VerticalNet's gamble will pay off.
Galli sees it otherwise.
"Converge will become a valuable publicly traded company, so we believe this deal is going to produce a fantastic return for VerticalNet shareholders," he says.
And if Converge does take off, and VerticalNet starts selling a lot more software, investors and analysts may just cut the company some slack for its other major line of business -- operating 58 industry-specific online communities. VerticalNet has struggled to turn these communities into true, e-commerce marketplaces. At this point, suppliers have used the communities to make a first push onto the Web through advertising and generating sales leads, but have not yet done much actual online selling.
Galli says VerticalNet still is committed to growing its online industry communities, despite its new focus on the software business. In fact, 14 VerticalNet communities centered around the electronics industry will be linked to Converge.
But in a previous interview, Galli admitted that operating online communities, or marketplaces, was a tough business, especially because e-commerce adoption was slow. So with Wall Street giving short shrift to other marketplace operators like Ventro (VNTR), Sciquest (SQST) and PurchasePro (PPRO), Galli can't be faulted for wanting VerticalNet to look a lot less like those companies, and much more like Ariba and Commerce One.
But some analysts are questioning whether this new strategy will work. Prudential and W.R. Hambrecht downgraded VerticalNet today. Hambrect lowered it to "buy" from "strong buy," saying "while several potential positives may arise from this deal, we believe near- and medium-term risks and uncertainties surrounding the VerticalNet 'story' merit continued caution from investors." |
