MarchFirsts path to financial stability is getting steeper. The Internet services firm has until this week to pay off a bank loan of at least $53 million and may need $250 million beyond that sum to recapitalize its business, according to a source familiar with the situation
MarchFirst, which has been battling to rein in costs for months, posted a fourth-quarter net loss of $73.2 million. In addition, the company incurred a special charge of $6.5 billion to write off the balance of the goodwill associated with the merger that created the company a little more than a year ago.
MarchFirsts ongoing financial trouble and depressed stock price apparently has led to the ouster of Robert Bernard as president and CEO. That move may underscore the frustration of Francisco Partners, the $2.5 billion private equity firm that invested $150 million in December to keep MarchFirst operating. Francisco Partners has two seats on MarchFirsts board of directors.
In removing Bernard, Francisco Partners is reacting to a financial situation that has not improved, industry observers say. "I think this is the reaction of a company [Francisco Partners] that is disappointed in their investment," says Sandra Notardonato, an analyst at Adams, Harkness & Hill Inc. "But everyone needs to remember that Bob Bernard built a successful Whittman-Hart." Bernard is expected to retain his post as MarchFirsts chairman.
Francisco Partners officials could not be reached for comment.
The source familiar with the funding situation says the companys board decided at a meeting two weeks ago to remove Bernard from day-to-day operations. A MarchFirst spokesperson, however, says the board did not meet and that Bernard remains CEO.
The source suggests MarchFirst may be waiting for the latest round of financing to come together before announcing the management shift.
As for the financing, a Chicago affiliate of Bank One Corp. has called in a loan, which MarchFirst must repay this week, the source says. According to a Security and Exchange Commission filing, MarchFirst has borrowed or secured letters of credit totaling at least $53 million under the credit facility, which expires March 15.
Divine Intervention? Francisco Partners may pick up the tab for the loan. But MarchFirst may obtain additional funding from both Francisco Partners and another source: Divine Inc. (formerly Divine InterVentures). The source says Divine may fund as much as half of MarchFirsts recapitalization effort, with Francisco Partners providing the balance.
A spokesperson for Divine says the company doesnt comment on rumors or speculation. Divines investment in a struggling services company would be surprising, given the incubators revised strategy to focus on software solutions.
Once MarchFirst secures funding, observers say the company will move to create a new management team. Notardonato expects MarchFirsts board to bring in a new CEO with turnaround skills. Sm@rt Partner learned the board plans to tap Thomas Epley, chairman of DSL product maker Paradyne Corp., as interim CEO.
Mr. Fix It Epley joined Paradyne as a turnaround specialist when Texas Pacific Group acquired the company in 1996. Leading that investment was David Stanton, who directed Texas Pacifics technology strategy prior to founding Francisco Partners. Stanton and Neil Garfinkel sit on MarchFirsts board. A spokesperson for Paradyne calls Epley "a gifted leader," but was not aware of any move to MarchFirst.
MarchFirst also must "find a break-even point" as it tries to reconcile head count and a falling revenue stream, the source says. MarchFirsts Q4 revenue of $213.5 million marked a 42 percent decline compared with Q3. The company has forecast Q1 sales between $190 million and $215 million. "Given that revenue trend, there have got to be more layoffs," the source says.
The company has eliminated 2,100 positions since November. But another source close to MarchFirst says that further cuts are in the offing, potentially affecting hundreds of employees.
MarchFirst, meanwhile, may be closing some ancillary operations. Sources say the company has pulled the plug on Bluevector LLC, its venture capital arm. Bluevectors Web site was off-line last week. Joseph Josephson, managing partner of Bluevector, last week joined Lazards San Francisco office as a managing director.
The maneuverings point to one conclusion: Fixing MarchFirst will take longer than its backers expected.
"Its pretty apparent given that where the stock price is, their [Francisco Partners] investment horizon needs to be extended longer than they had anticipated," says Notardonato. "You have a company thats burning a lot of cash."
Mark Mehler contributed to this story.