Looking For Hope Amid Ruins

Despite shakeout, VerticalNet sees opportunities for renewal.

Investors gasped last week when Joe Galli left his post as CEO of business-to-business e-commerce enabler VerticalNet Inc. to take the top spot at consumer products maker Newell Rubbermaid Inc.

To many, it was the latest repudiation of the e-marketplace business model and led some to say the shakeout in B2B businesses is in full swing.

The shakeout in vertical e-marketplaces showed itself elsewhere. OneChem Ltd., an e-marketplace and application service provider for the chemicals industry, quietly laid off half its 40-person work force last week. Also last week, food services company Instill Corp. laid off 36 of its 200 employees.

Net market FoodUSA.com was scrambling to keep from closing its doors. Like Ventro Corp., which closed two e-marketplaces last month, Food USA.com officials blamed their companys problems in part on the arrival of a competing exchange led by industry heavyweights, including IBP Inc. and Tyson Foods Inc.

But VerticalNet is different, said founder Michael Hagan, who was named the companys new CEO last week. Unlike Ventros e-marketplaces or OneChem, it does not charge a fee on every transaction completed on its marketplaces. Instead, it charges an annual fee for things like electronic storefronts that enable small and midsize companies to engage in e-commerce. One of Hagans first tests will be to persuade VerticalNets customers to renew their storefront contracts, many of which come up in the next quarter.

Hagan sees those renewals as an opportunity to sell new products, including hosted customer relationship management applications, inquiry management tools, and online customer service and help desk software. Through its partnership with Microsoft Corp., VerticalNet will integrate Great Plains Software Inc.s accounting software, Hagan added.

But first, the Horsham, Pa., company has to get the egg off its face left by Gallis departure. In August, VerticalNet trumpeted the appointment of Galli, who came from Amazon.com Inc.

Although Hagan said Galli was not involved in all the strategic decisions that the company made during his five-month tenure, some analysts said Galli helped VerticalNet begin to move beyond startup mode by splitting the company into three divisions and bringing maturity to the sales force.

Industry analysts say that the rush by companies in the B2B space to use public shareholder investment during their sensitive startup phases has taken the bloom off the B2B rose. As was the case with the stock market craze for business-to-consumer dot-coms, many investors in B2B companies had unrealistic expectations, said George Santana, an analyst at Los Angeles-based Wedbush Morgan Securities.

"These companies probably should not have raised so much money in the public markets," Santana said. "Thats not to say that all of them are going to fail. The right formula has to be found. I think that is going to happen in 2001."

As some of those e-marketplaces struggle, Hagan sees an opportunity. "Well be a consolidator in 2001," he said.

Hagan looks to double revenues and make VerticalNet profitable this year. Still, the company isnt out of the woods. For example, its offer to buy online financial services company SierraCities.com Inc. is likely to expire this week without the deal closing because VerticalNets stock price has dropped more than $20 per share since the tender offer was made last fall.

If the deal falls through, then VerticalNet will still license SierraCities technology and integrate it into its software and services offerings, Hagan said.