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Hard-charging MarchFirst retreats

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At a conference earlier this year, MarchFirst Inc. Chairman-CEO Robert Bernard sat on a panel and disparaged what he called "market cap heroin," whereby executives, intoxicated by their company's stock price, forgot about developing a solid business plan.

Now some analysts question whether Bernard was minding his own business plan. On Nov. 13, his Internet professional services firm announced it was trimming 1,000 employees, or 10% of its workforce. The company expects the cuts will save about $100 million annually beginning next year-which, however, will put only a mild dent in the net loss of $436.7 million for third quarter 2000.

Other Internet professional services firms, such as Viant and Xpedior Inc., have also struggled lately. But with brand-name clients such as Apple Computer Inc., Harley-Davidson, and Saks Fifth Avenue, MarchFirst seemed as if it might be immune to the fallout of the dot-com crash. The company, formed by the March merger of Whittman-Hart and USWeb/CKS, was widely recognized for the quality of its work. It won a Clio award and a bronze lion at Cannes Cyber Lions awards and was recognized by BtoB as one of the top b-to-b interactive agencies.

Additionally, MarchFirst's high-profile ad campaign, on which the company is report-edly spending as much as $50 million, also gave the firm an aura of health. The ads, both in print and on television, show people's reactions to various "firsts"-the first man on the moon, the first miniskirt. The campaign, created by McKinney & Silver, Raleigh, N.C., is a lightning rod for criticism.

"I think it was a lot of money to spend, and I'm not 100% certain that they got their message across," said Sandra Notardonato, analyst with Adams, Harkness & Hill Inc.

Marketing and agency executives have been less than kind. "My favorite example of a stupid ad campaign right now is the MarchFirst ads," said Mark Jarvis, Oracle Corp.'s senior VP-marketing. "They are wasting millions of dollars on brand-building ads that rely on abstract thoughts and don't tell you anything about the company."

Perhaps the ads were a clue that all was not right at MarchFirst. The first undeniable sign that the company had some serious troubles came on Oct. 24, when the company reported its third quarter results fell well short of its earnings estimate. Its third quarter revenue of $369.4 million was down from the second quarter's total of $380.2 million.

The company's share price, which was $3.75 at the close of trading Nov. 17, has plummeted 95% from its 52-week high of $81.13. A class-action lawsuit, filed last week, alleges company executives issued "materially false and misleading statements to the market." MarchFirst is contesting the complaint.

Troublesome combination

MarchFirst's troubles stem from a combination of merger integration woes and market forces, according to industry observers. Its ill-advised marketing spending may have also played a role.

Last December, when Whittman-Hart announced it planned to acquire USWeb/CKS, many analysts questioned the move, wondering whether the market wanted one-stop shopping for its consulting, IT and advertising/design services. MarchFirst has no plans to abandon this approach.

Beyond that basic question, analysts predicted the company would be challenged in integrating the two operations. "USWeb was one of the riskier acquisitions to make, considering it was a roll-up combining so many different cultures and financial systems," Notardonato said. "That makes for a very difficult integration."

"We do not believe it is the result of the merger at all," countered Kelly Miller, MarchFirst media relations manager. She blamed the company's troubles on the market downturn and "getting ahead of ourselves in the hiring cycle."

"Everybody's getting whacked around a little bit," she added.

Indeed, a Merrill Lynch report noted that other Internet professional services firms have cut jobs, including Razorfish Inc., Luminant Worldwide Corp. and Xpedior. Additionally, Viant Corp. reported a loss in the third quarter, prompting President-CEO Bob Gett to acknowledge in a statement, "This was a difficult quarter for Viant."

But not every Internet professional services firm is suffering the wrath of analysts. Southwest Securities Group Inc., for instance, reiterated its accumulated rating on Sapient and its buy rating on Proxicom Inc. For its part, Proxicom credited its optimistic outlook in part to avoiding dot-com projects, which account for less than 5% of its revenue. Instead, Proxicom has concentrated on large projects for Fortune 500 companies, most often with a b-to-b focus.

On the other hand, MarchFirst, while it does have b-to-b clients such as American Airlines Inc. and Visa.com, has worked with many dot-com and consumer sites, such as Barbie.com and Pottery Barn's Web site. Nonetheless, both MarchFirst and Proxicom are hovering near 52-week lows as the Internet sector's attractiveness has faded since April.

MarchFirst faces a difficult task in getting back on track. Analysts, however, remain confident in the management team. "Bob Bernard has a great track record over the years," said Michael Hutchison, analyst with Barrington Research Associates.

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