A B2B Makeover Story

Despite the early hype, B2B e-marketplaces have turned out to be
spectacularly less successful than anticipated, putting players such as
Verticalnet and others in a scramble to refocus their business model along
more profitable lines, such as software.

And for Verticalnet , whose stock is down in the 15 cents
a share range, that refocus may be coming just in time.

The Malvern, Pa.-based company, a former rising star in the industry-specific
vertical markets arena with a stock price that at one time was more than $140
a share, is buying down debt and executing a reverse stock split to shore up
its financial position.

And, the company just completed the sale of its Small and Medium Business
Group (SMB), which at one time was the heart of the operation with its 59
online marketplaces for various types of businesses.

At least in the early stages of the concept, online exchanges were considered
to be the wave of the future, one analyst said. The perception was that
online companies could build a virtual marketplace, match buyers and sellers
in an industry, help them consummate transactions, and make money by charging
a small fee.

But things didn’t quite work out that way. Verticalnet, for instance, lost $768.3
million on revenues of $125.6 million last year.

But these days the company is focused on enabling software, specifically a
suite of solutions that it calls the Collaborative Supply Chain, consisting
of Strategic Sourcing, Collaborative Planning, and Order Management apps. All
three applications are combined in its eXtended Enterprise Management
Foundation, in effect a private trading hub.

“What we focused on is taking our core technologies and finding ways to
enable businesses to do business better,” said Nathanael Lentz, the company’s
senior vice president for strategy and marketing. “We are trying to create a
focused business around software.”

And that’s been an ongoing process, he told nternetnews.com, starting with
the acquisition of Isadra in 1999, Tradeum in the
spring of 2000
and Atlas Commerce in December of last year. In fact,
Verticalnet was nearly finished with
its facelift
in February after spending much of 2001
and ridding itself of other unprofitable businesses.

The software effort began taking off in 2000 when the company launched a
software division called VerticalNet Solutions.
That year Verticalnet
also sold its
NECX business unit
, which focused on trading electronic components and
hardware in open and spot markets.

Why were so many people and so many companies so wrong about e-marketplaces?

“What happened with companies like Verticalnet, CommerceOne , Ariba — businesses have been finding ways
to make the exchange of goods and services for thousands of years … the new
technology was evolutionary, but was mistaken for revolutionary,” said Jon
Derome, a senior analyst at Yankee Group.

Lentz echoed that thought. “People made early assumptions and drew
exponential lines based on them,” he said. But it turned out that “the New
Economy is really just an enhancement of the old economy.”

Derome told internetnews.com that there were basically two problems with the
concept of B2B marketplaces: 1.) It’s expensive and difficult to integrate
all the systems involved,
because of disparate hardware and software; and 2.) Business culture doesn’t
change all that rapidly — you need to deliver a significant amount of value
to change behavioral patterns on the part of businesses. The intermediary
needs to deliver a lot of value to drive a change in a business’s
relationship with its suppliers.

“Yankee Group was cautious in forecasting success for e-marketplaces, but we
weren’t cautious enough,” he said.

Indeed. Companies like B2B marketplace player Ventro once had a $10 billion
market cap. When the
bottom fell out
, it transformed itself into NexPrise , with a stock
in the $4.50 range – after a 1 for 15 reverse stock split.

Even companies like General Electric bought into the concept,
only to find itself just recently selling off
its B2B e-commerce company
, GE Global eXchange Services (GXS).

Will the new direction for Verticalnet work out?

“I think Verticalnet is on the right track,” Derome said. “They don’t have a
lot of options, and among their options, I think that (applications) is the
best one to choose.”

Now, the company is under new management — CEO Kevin McKay, a Verticalnet
director and former SAP America chief executive officer replaced co-founder
Michael J. Hagan, who became chairman. The flamboyant former CEO, Mark Walsh,
is now the CTO for the Democratic National Committee.

And the new management is embarking on its financial makeover.

First the company repurchased all of its Series A preferred stock and
associated accrued dividends and warrants, currently recorded at
approximately $106.0 million, for a total cash consideration of $5 million.
That eliminates about $106 million in balance sheet obligations, the company

Second comes the 1 for 10 reverse stock split, designed to head off delisting
by Nasdaq. It’s effective July 15.

And thirdly, the sale of Verticalnet’s SMB business to Corry Publishing Inc.,
operator of isit.com, was completed — for an up-front
cash payment of $2.35 million and a four-year performance-based earn-out of
$6.5 million as well as the assumption of certain liabilities. Verticalnet
has reflected the SMB division as a discontinued operation since Jan. 1.

“These actions represent a significant step forward towards creating
shareholder value … and securing the company’s long-term fiscal health…”
McKay said.

Verticalnet’s biggest challenge now is just staying in the game long enough
to let its product line gain some traction. Its recent actions should help, < a href="http://www.amrresearch.com/">AMR Research analysts said recently,
adding that:

“Given its ramping traction, A-list of prospects and rapidly decreasing cash
burn rate, Verticalnet could be back on track to find its golden road.”

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