VerticalNet shifts survival strategy to software

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VerticalNet Inc. is facing an uncertain future following massive job cuts and a series of moves that take the company further away from its original aim of being the premier online b-to-b marketplace and a major provider of business content.

Yet despite constant zigzags with its business plan, VerticalNet insists it will remain an independent company, primarily focused on developing sell-side software.

Horsham, Pa.-based VerticalNet has been morphing into an e-business software maker for months. Microsoft Corp. recently invested $40 million in VerticalNet to help the software giant develop products for small and midsize businesses.

VerticalNet also has a new sales and marketing alliance with Computer Sciences Corp., an information technology services company. In February, it sold NECX, its online trading exchange for electronic components, to high-tech online marketplace Converge Inc.

Varying opinions

Opinion is sharply divided on whether VerticalNet has the technological know-how to become a bona fide software company.

VerticalNet might already be gone were it not for the big Microsoft investment and the CSC deal, said Peter Cohan, president of Peter S. Cohan & Associates, a management consulting firm. He speculated the former deal could be a springboard for Microsoft buying VerticalNet outright.

“As a private marketplace it’s clearly not self-sustaining,” Cohan said. “It’s a little late in the game in software. There are a number of software companies—Ariba, Commerce One—that are already doing what VerticalNet has been gravitating toward.”

John Ederer, an analyst with San Francisco-based Pacific Growth Equities Inc., offered a more upbeat outlook, saying VerticalNet is carving a different niche. “They’re focusing more on the supply side, whereas some of the others are more focused on the buy side,” he said. “They need to take that strategy and carry it forward.”

VerticalNet CEO Mike Hagan stressed the company will continue its strategy of helping software suppliers patch into the marketplace. “We don’t want to compete with [companies such as Ariba Inc. and Commerce One Inc.]. They’re focused on procurement, and we’re focused on the supply side,” he said.

Hagan pointed out that the company now has more than $100 million in cash on hand and expects to be profitable by the fourth quarter.

Bob Lewis, CEO of Converge, said VerticalNet has the best technology to enable an exchange dealing in direct Web procurement. “The market is largely unaware of VerticalNet’s excellence in technology because its business plans have changed,” he said. “In six to 12 months, you’ll see a different perception in the marketplace.”

But can VerticalNet survive considering the battering it’s taken?

In April the company slashed 270 employees, or 25% of its work force, on top of 150 job cuts in January. The most recent cuts were announced on the same day that VerticalNet posted a first-quarter loss of $28.2 million, or 30 cents a share, compared with a loss of $13.6 million, or 18 cents a share, a year earlier. VerticalNet’s stock has been hovering around $1, down from a 52-week high of $63.

Tom Kemp, chairman-CEO of Penton Media Inc., reflected the views of other traditional business publishers when asked about VerticalNet’s transformation into a software technology company.

“They underestimated the strength of existing readers, exhibitions and advertisers and the strength of our brands,” Kemp said. “They also underestimated our commitment not to let someone else eat our lunch.”

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