BtoB

Verticalnet exits e-marketplaces, buys tech firms

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For Verticalnet Inc. Chairman Mike Hagen, it’s been a long, strange b-to-b trip.

In its early years—almost a decade ago now—Verticalnet came out of nowhere to create online communities that attracted vertically niched audiences, as well as advertising typically reserved for trade magazines. It became a flash point for controversy as traditional b-to-b media wrestled with the impact of the Internet on their business.

Later, the company added a charismatic CEO in interactive industry pioneer Mark Walsh, launched a successful IPO and saw its stock soar to unbelievable heights thanks to the hype surrounding b-to-b exchanges.

Just as quickly, Verticalnet came crashing back down to earth in 2001. Walsh was kicked upstairs, then the company gained and lost another high-profile CEO, Joe Galli (formerly of Amazon.com and Black and Decker). It saw practically all of its stock market value disappear, and Hagen scrambled to find a new strategy to keep the company afloat.

Re-inventing … again

Now Hagen—who helped found Verticalnet, later stepped into the background when it soared, then became its CEO when times turned tough—has re-invented Verticalnet yet again. In early January, the company acquired Atlas Commerce, a privately held vendor of supply chain technology. It was the third in a string of technology company acquisitions by Verticalnet.

In February, Hagen made the biggest move of all by putting up for sale the 59 vertical e-marketplaces that gave the company its name and upon which the entire enterprise was built. The marketplaces generated $16 million in revenue in the fourth quarter, out of $24 million in total revenue for Verticalnet.

Through cuts and reductions, the marketplaces are now "cash flow positive" as a group, Hagen said.

At about the same time the marketplaces were put on the block, Hagen stepped out as CEO again, naming Kevin McKay, former CEO of technology giant SAP America as his successor. Hagen remains chairman.

Tough search ahead

Finding a buyer for the e-markets might be tough. Publishing houses aren’t exactly swimming in cash these days, and analysts question the value of what remains.

"If a publisher could integrate it with their print product, making the print product the driver, it’s possible" an acquisition would work, said Roland DeSilva, managing partner of DeSilva & Phillips Inc., a New York-based media investment bank. "But I don’t think [Verticalnet] has anything that they [publishers] haven’t done themselves."

DeSilva added: "I always thought the concept was unworkable. The major mistake they made was they thought they could take the legacy audiences that publishers had had for years. That just never happened, and it never will happen."

What went wrong?

But that’s all in the past for Verticalnet. The next stage in the company’s saga will be finding a way to sell b-to-b e-commerce and supply chain applications against giants such as Oracle, SAP and PeopleSoft, not to mention fellow upstarts such as Commerce One and Ariba.

"It’s been a wild ride since I started this company," Hagen said. "The first four years were typical, out-of-cash, burn-through-your-credit-cards entrepreneurial stories. The IPO addressed all the stability questions, at least for a while. Then in 1999 and 2000, it was all about wild growth, about revenue and market share."

Yet even at Verticalnet’s height, company executives realized that its strategy to turn its public marketplaces into subscription- and transaction-fee-generating powerhouses just wasn’t going to happen, Hagen acknowledged.

"Transaction fees, for middlemen in marketplaces, were not taking off, regardless of the hype surrounding the space," he said.

Last year was especially painful for the company, as it cut back its ranks and reorganized to become a software vendor. The recent announcement of the plan to sell its e-marketplaces "was a last signal to employees, customers and Wall Street of our intention to be a pure-play software company," Hagen said. "Clean and simple [business strategies] are being applauded right now.

"I wish I could tell you with any sense of honesty that we could have predicted the meltdown. But we didn’t anticipate it. We knew there’d be a pullback, but we had no idea it would be so complete, so quick. Overnight, the game changed. If you didn’t have earnings you were not going to grow your stock."

Hagen said he still believes in e-marketplaces and thinks Verticalnet’s communities could eventually blossom into a winning business. But too many other exchanges flooded the marketplace with flawed business models and over-hyped expectations, he said.

"Five years ago, we were going out talking to customers, and they weren’t looking at the Internet to migrate business relationships," Hagen said. "Industrial companies were reluctant to migrate their century-old relationships to a new communications platform without understanding how it changed their economics."

Hagen contends Verticalnet had a winning strategy in place early on by focusing on smaller suppliers as an audience and lead generation as a business model. But that approach, despite great margins, would never have generated the kind of revenue Wall Street was expecting, and more aggressive exchange-oriented business models simply didn’t pan out, Hagen said.

"Transaction fees appeared to everybody to be the holy grail, but they just weren’t happening," he said.

New business model

Verticalnet’s new business is selling software to big businesses, and the business model is clear: If they can sell enough, they’ll be successful. Atlas Commerce brings with it some very strong customers, including Wal-Mart Stores Inc. and Pepsico, which use its supply chain platform to manage orders and collaborate with trading partners.

Verticalnet was already having some success selling its own so-called "spend management" system, a hot new software category that helps companies manage their strategic sourcing online. Verticalnet will integrate its disparate e-business products into a single platform beginning this spring and plans to release another, more deeply integrated software platform this summer.

Despite the bumpy road ahead, the company’s future is not without promise. Technology consultancy AMR Research is betting Verticalnet can "break its association with being an exchange operator and build the momentum that it will need to survive," according to analyst Pierre Mitchell.

If Verticalnet can do that in today’s tough software market, it may have pulled off its biggest surprise of all.

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