Marchfirst sure could have used the $50 million last fall. Instead, what was then the world's biggest Internet professional services company continued with a $50 million marketing campaign to court prospective employees and clients.
TV ads appeared on October's Major League Baseball playoffs and continued into November, airing at least until Thanksgiving week. But on Nov. 20, the company made an alarming admission in its quarterly earnings filing with the Securities & Exchange Commission: The money-losing venture needed to raise $50 million by year-end and another $50 million in early 2001 to pay its bills.
This was no time to be spending money on advertising.
McKinney & Silver, itself a MarchFirst unit, had, in a rare moment of corporate synergy, created the ad campaign, which broke during the Wimbledon tennis tournament in mid-June 2000. Oblique ads didn't explain what MarchFirst offered; instead, the campaign was designed to draw visitors to its Web site. The campaign accounted for more than $30 million of the $50 million, half-year marketing blitz.
David Baldwin, executive creative director at the Raleigh, N.C., ad agency, offers a clue as to why MarchFirst continued to run a campaign aimed at hiring yet more people: At least as late as October, he said, it still needed to hire. But below the surface, MarchFirst was unraveling. Within six months, the company, which once had a valuation of $7.2 billion, had filed for bankruptcy liquidation, its operating divisions sold off piecemeal.
Former Chairman-CEO Robert Bernard, who has commented infrequently since the company folded, retorts to critics of the marketing blitz: "It's easy to say that. It's like looking back at history and asking, `Why did Lincoln go to the play?"'
Mr. Bernard and two other top executives resigned from the company in March, weeks before bankruptcy. "I have my accountability and so does every other individual in the company," says Mr. Bernard. "I know not everyone can say they worked for the best interests of the company. I know I can say I did."
The revelation in November that MarchFirst was cash-starved signaled a swift fall from grace for a company that, at its birth--March 1, 2000--seemed as though it might capitalize on the bombast of the era. Proclaimed Mr. Bernard on that day, "Today is day one of an entirely new kind of company--one that on a global scale can help clients achieve the business integration required for success in the digital economy."
This was the first company to attempt to merge, on such a scale, the front-end capabilities of one of interactive's best-known conglomerates, USWeb/CKS, with a powerful, but staid, back-end systems integration company, Whittman-Hart. Together, the two companies had revenues of $1.2 billion, spanned 70 offices in 14 countries and had approximately 9,000 employees. "On paper it made a lot of sense," says Robert Shaw, the former head of USWeb/CKS.
Outside observers were less charitable about the firm's reason for being. Gary Dean, an analyst with investment banking firm Robert W. Baird & Co., contends that Mr. Bernard, who had led Whittman-Hart prior to the merger, "had a case of valuation envy."
Mr. Bernard says the aim was to create "a full range of business and interactive services for large companies and fast growing companies."
The costly ad campaign and the admission that the company still needed more money fast were hardly the first early warning signs that MarchFirst didn't have its act together. On Oct. 25, the company stunned Wall Street by substantially missing its third-quarter numbers, reporting a net loss of $436.7 million. The stock immediately plummeted 59%.
Perhaps the biggest problem with the October earnings announcement was how it was handled. Starting in late August, a slew of MarchFirst competitors, including Viant, Organic and iXL, issued earnings warnings to Wall Street. But MarchFirst didn't, leading industry watchers to believe that perhaps it was swimming happily through the deluge. When it became clear that MarchFirst wasn't, investors panicked. Between Oct. 26 and Nov. 17, nine class action lawsuits were filed alleging the company had misled investors.
MarchFirst wasn't alone in its troubles, but many observers point to it as the poster child for bad Internet roll up schemes. The company got too big too fast and reached too far.
Other i-shops became enamored of the idea of plowing money into marketing campaigns. But MarchFirst went as far as to spend $50 million. While other Internet-oriented companies expanded quickly through acquisition, only MarchFirst did so on such a grand scale.
It took little more than a year for MarchFirst's doors to open and shut and its divisions to be sold. The core assets of Whittman-Hart, a company Mr. Bernard had spent 16 years building, were sold off to a Chicago-based Internet incubator, Divine Inc., for just $10 million in cash and a $60 million balloon payment due in five years.
According to SEC filings, the aggregate sale price for McKinney--bought by Havas Advertising--and MarchFirst's Salt Lake City operation--sold to management--was about $13.6 million and the assumption of about $17 million in liabilities. That wasn't much more than the $24 million a MarchFirst predecessor, CKS Group, paid for McKinney alone in 1997.
The advertising/marketing side of MarchFirst started in the late 1980s when former Apple Computer executive Bill Cleary formed Cleary Communications--later renamed Cleary, Kvamme & Suiter--as a high-tech agency in the pre-Web Silicon Valley. The firm's goal was to marry traditional advertising with new media.
The agency made its mark in interactive marketing, attracting an early investment from Interpublic Group of Cos. and jumping on the initial public offering boom by going public in December 1995. It also gobbled up companies such as traditional agency McKinney. McKinney CEO Don Maurer says Mark Kvamme, the charismatic chairman-CEO at CKS, wowed him. "He talked about how the Internet would change marketing," Mr. Maurer recalls. Mr. Kvamme, one of the most prominent early Internet advertising executives and now a venture capitalist, declined repeated requests for comment.
CKS executives had grand ambitions, but also had a tough time digesting all they swallowed. "We tried to integrate back then, but the cultures were so different," says Mr. Maurer. As CKS grew bigger, it took its share of hits; its stock plummeted 63% one day in Nov. 1997 after the company warned it wouldn't meet fourth quarter earning expectations.
After its roller-coaster stock ride, CKS executives began acquisition talks with USWeb, an Internet services firm. USWeb itself was a hasty rollup, having employed a franchise-style business model in which it snapped up a smorgasbord of local Internet companies. Following discussions between Mr. Kvamme and USWeb's co-founders, Toby Corey and Joe Firmage, USWeb acquired CKS in a $540 million stock swap in December 1998. Because the company wanted to reinvent communications, it chose Reinvent Communications as its name, a plan it had to scrap when another company claimed ownership to it.
The two firms formed a behemoth patchwork of about 50 acquisitions. The company had plenty of services, but had further exacerbated its integration problems.
USWeb/CKS executives and board members, including Mr. Firmage, brought in Robert Shaw, a former Oracle Corp. executive, to manage the company. Mr. Firmage, who had been public about his belief in UFOs, soon left to pursue his interest in outer space.
USWeb/CKS was subsequently divided into earthbound U.S. regions. But even then, one regional manager recalls, it was difficult to get the young, strong-willed USWeb/CKS executives to agree.
According to Mr. Shaw, the market had started to demand the full integration of front-end disciplines, such as design, with the back-end technology that makes interactivity work. So, the barely integrated company began talking to back-end provider Whittman-Hart in 1999. Such a merger would create an all-inclusive provider of e-commerce services. "They had tremendous back-end capabilities. We had the front-end marketing and branding, and the ability to build Internet services," he recalls.
Whittman-Hart was located in Chicago, far from USWeb/CKS's base in the epicenter of dot-com San Francisco. The Midwestern company had enjoyed quiet success in its back-office niche, and it had consistently posted strong revenue and become a hot stock. But it wasn't considered an Internet company, which analysts contend bothered Mr. Bernard.
"Whittman didn't have Internet snazz, the market had shifted to the Internet and they wanted to shift with it," said one analyst who asked to remain anonymous.
The merger was announced Monday, Dec. 13, 1999, turning a humble Chicago systems integrator into a global force in Internet professional services. The week prior, Whittman-Hart hit its all-time high of $80.88. But Wall Street did not bless this merger. On Dec. 13, Whittman-Hart's stock tumbled 31%, closing at $54.50.
Baird analyst Mr. Dean questioned why a stable, prosperous company such as Whittman-Hart would make such a reckless move.
At the beginning of 2000, Mr. Bernard flew the company's top executives to Florida to rally management. Mr. Shaw kept his hotel suite open into the wee hours. However, Wall Street wasn't joining the party. By the end of January, the stock had slumped into the $30s, with the deal still yet to close. And Nasdaq hadn't even crashed yet.
Once the dust had settled, Mr. Bernard seemed surprised by what he found. "Until you get into the details post-merger, it is difficult to see until you are living it day-to-day," he says. "Having to integrate 20 to 30 companies made a lot of those issues difficult."
The deal closed March 1st, 2000. That month, Mr. Shaw resigned from the board rather than remain as chairman. Mr. Shaw, now president of Silicon Valley Internet Capital, recalls: "There has to be one person in charge and for the best interest of the company at the time we picked Bob."
Asked if, in hindsight, Mr. Bernard was the right choice, Mr. Shaw declined comment.
Initially, MarchFirst seemed to dodge the consolidation layoffs typical in mergers. Defying naysayers, management told employees early in the year it planned to add another 2,500 people.
But Wall Street's attitude toward the company had made its mark. "[Management] said MarchFirst was here to stay and don't believe what other people say," says Steven Strong, a former MarchFirst director of production services who now heads up a MarchFirst alumni network.
But there was reason to be nervous; the e-solutions space started to stall. Just weeks after the deal closed, the Nasdaq started its descent. MarchFirst had no time to gain its footing.
Indeed, the first time the lack of integration became publicly apparent may have been on that fateful Oct.25--both Mr. Bernard and Steve Pollema, a long-time Whittman-Hart executive who became president in March, concede that integration problems were partially responsible for the company not being able to see what was going on in the third quarter.
Mr. Pollema recalls that USWeb/CKS and Whittman-Hart had each installed different accounting systems at the end of 1999. With the systems uncoordinated, corporate didn't realize the dramatic effect of the dot-com drop-off and decline in technology spending until too late. "Individual operators could see going into the third quarter that things were starting to turn down on the demand side," he says.
Mr. Bernard saw the problems as strategic rather than technological, but contends there was plenty of awareness of the business slowdown among middle management. "Project management, regional management and office management individuals were clearly aware of payments or lack of payments," he says.
MarchFirst was now faced with an irony: It was a systems integrator that couldn't figure out how to integrate the kludged together businesses it owned.
Even after the third quarter, MarchFirst alumnus Mr. Strong says employees continued to believe. In December "when it came out that we [were being loaned] $150 million to keep the lights on, that's when people woke up."
MarchFirst did eventually get the cash it said it needed in November, selling a 32% stake in the company to San Francisco investment firm Francisco Partners in exchange for $150 million. But, the death march had begun. Other Internet consulting firms, desperate for new business, began to go after MarchFirst clients, and MarchFirst began laying off staff.
"It was very difficult," says Mr. Pollema. "Employees begin to lose faith. Your customers begin to lose faith in your solvency. The existing clients began to express concern and new business started to fall off."
In mid-March 2001, Francisco Partners told MarchFirst it wouldn't invest the additional money it would take to turn the company around. Before trading halted on April 12, the stock was at 31? per share; its post-merger high had been $51.56. The company also filed for Chapter 11 bankruptcy protection on April 12; two weeks later, it converted that to Chapter 7 liquidation.
Investors lost millions; Interpublic, which kept some CKS stock as CKS morphed into MarchFirst, took a first-quarter writedown of $160.1 million for interactive investments including MarchFirst. But it's the employees who feel the pain most. In an e-mail to alumni employees, Mr. Strong wrote: "Any remaining [dollars] due to employees from any source whatsoever go into the big pool of unsecured creditor claims and could be paid out at some pennies, nickels, dimes or quarters on the dollar ratio up to two years down the road." He added it's "very unlikely that we'll get 100% owed."
Mr. Pollema says he'll continue the process of closing MarchFirst. "If I could meet every employee and creditor request, I would. In a heartbeat. But I can't."