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These days, Meakem is scrapping to become the big kahuna of online business-to-business marketplaces. It's shaping up as a bloody battlefield. With too many marketplaces chasing too few dollars, analysts expect 85% of the 1,000 or so online exchanges to bite the dust over the next three years. But thanks to the leadership and vision of the 36-year-old Meakem, FreeMarkets stands to be one of the successes. "FreeMarkets has demonstrated itself as a leader at this stage -- and they're well positioned to extend that leadership," says Timothy Klein, senior research analyst with U.S. Bancorp Piper Jaffray. While most B2B exchanges are stuck on the drawing board or struggling to attract buyers and sellers, the Pittsburgh-based marketplace has staged more than 5,000 auctions and moved $7.6 billion of goods and services since its 1995 founding. FreeMarkets helps corporations and governments manage procurement online -- which can shave 10% to 20% off purchasing costs -- and team them up with better suppliers. And business is picking up steam. In the quarter ending June 30, 2000, FreeMarkets conducted 1,400 auctions worth $2.2 billion, making it the busiest B2B exchange. Its closest rival, with a sharply different business model, is VerticalNet Inc., based in Horsham, Pa. For now, the Street likes FreeMarkets pretty well, but VerticalNet a tad better: FreeMarkets is the second-most valuable online exchange operator, with a $2.5 billion market capitalization and an average analyst rating of 1.65 (1 represents a strong buy). VerticalNet boasts a $3.6 billion market cap and an average analyst rating of 1.6. INTO THE RED. Hold the hosannas, though, at least for now. While it was profitable in 1998, FreeMarkets moved into the red over the last 18 months as it stepped up investment to expand the business. Analysts forecast it will return to profitability by the third quarter of 2002 -- up to a year after VerticalNet. FreeMarkets makes money by taking a cut of the site's auctions. With a commission of around 1%, FreeMarkets reported $19.4 million in revenue in the second quarter. The company plans to boost revenues by adding new customers and increasing the trading volumes of current customers, many still in three- to nine-month pilot programs. But the trends are at least moving in the right direction. In late August, Piper Jaffray analyst Klein estimated that FreeMarkets had already matched his third-quarter revenue estimate of $22.8 million with more than a month to go. And the company has already announced 13 new customers this quarter, including Microsoft. The son of a corporate executive and a stay-at-home mom, Meakem grew up in New York. He has always been entrepreneurial. From the ages of 12 to 14, Meakem ran a profitable lawn-mowing and landscaping business. Talk to people about Meakem, and they all tell you the same thing: He's that rare variety of big thinker who likes to get this hands dirty. "He conceptualized this company at a time when Netscape had barely been founded," says Marlee Myers, a managing partner with Philadelphia law firm Morgan, Lewis & Bockius, which is FreeMarkets' outside counsel. After the gulf war, Meakem returned to the career track. He finished his MBA and landed a job with consulting firm McKinsey & Co. An associate, he worked with companies engaged in industrial sourcing and commodities trading. It wasn't a sexy job, but in typical Meakem fashion he gleaned a key lesson that would serve him well. "The way you make money in commodities is through superior information and trades," he says. SWINGING IN THE RAIN. Max Scoular, a general manager at FreeMarkets who met Meakem when the duo worked at McKinsey's Houston office, describes him as a high-energy personality with an innate desire to lead. Scoular remembers one incident in particular. One December, Meakem had organized a golf outing for his McKinsey colleagues. Tee time was at 7 a.m. on Saturday. But it was sleeting and raining, so everyone figured they could sleep in. But that morning, Meakem left his compadres a voice mail insisting they play. "He got me and the whole field of 24 out there, and we had the most tremendous time in the sleet and rain," says Scoular, adding: "He really inspires people." After McKinsey, Meakem moved to General Electric Corp. for a chance to run at least a part of his own show while learning from a cadre of top-flight managers. "I'm not a consultant," says Meakem. "A consultant is a behind-the-scenes guy -- I'm more of a behind-the-podium person." Meakem conceived the FreeMarkets idea while plugging away as a manager in GE's Business Development Group. When Meakem learned in 1994 that GE was running an auction that required suppliers to fly into Pittsburgh and assemble in a hotel ballroom, he proposed a startup that would run the inefficient and costly process over the Internet. GE passed on the idea, setting the stage for Meakem to do it on his own. First he recruited former McKinsey buddy Sam E. Kinney Jr., now FreeMarkets' executive vice-president, to be his right-hand man. The two then recruited Mellon Bank tech guru Vincent Rago, who has since left the company, to build the auction software, and GE colleague Jim Zuffoletti, now a general manager, to line up buyers and suppliers. The four ran the company out of a small office in downtown Pittsburgh. By the end of 1995 they had created the reverse-auction software that would serve as their company's technological foundation by letting buyers post requests for goods and services, as well as other requirements such as delivery timetables. Then suppliers, who are screened by FreeMarkets, bid for the contracts. "Christmas, 1995, we felt like we had landed a man on the moon," recalls Meakem. BROADEN THE BASE. Thanks to Meakem's vision and early start, FreeMarkets is in a good position. But the race to become the king of online marketplaces is just heating up. FreeMarkets must continue to grow at a rapid pace while fending off heavy-hitting competitors such as software player Commerce One and marketplaces such as VerticalNet and Covisint, the auto-industry exchange. While many of those exchanges, including Covisint, are now in the planning stages, they are expected to open up for business by yearend. FreeMarkets must also continue to broaden its customer base. Two customers, United Technologies and Visteon, accounted for 21% of its revenue in the second quarter. On the plus side, the company has capital to fund its operations for about 18 months. That should get them close to profitability before they have to raise more. But FreeMarkets' biggest asset is the guy at the top. Ante covers the Internet for Business Week in New York |
