Can CMGI Incubate Itself?


By Faith Keenan When George McMillan took over as CEO of troubled Internet incubator CMGI (CMGI) last month, his first step was revealing. Instead of taking the spacious corner office of former CEO David Wetherell, McMillan set up shop in the middle of the ground floor -- right in the center of the action. The new chief is sending the message that he's a hands-on operator, whereas Wetherell -- who remains chairman -- is known as more of a strategic thinker.

"If you get smart people working on difficult problems, it's a lot more fun when you're sitting around arguing and creating than it is being sequestered in an office," says McMillan.

There's no shortage of difficult problems for McMillan to work on. The former CEO of BMG Direct (the music-club division of BMG Entertainment North America) has a job few execs would probably want. He took over as CEO after an eight-month stint in the chief financial officer role at CMGI, based in Andover, Mass.

OFFLOADING DEBT. Wetherell's move marked the end of an era. After running CMGI for 16 years, Wetherell, an Internet evangelist, saw his reputation plummet with the company's stock price. Under his guidance, CMGI, a onetime reseller of college course lists, had been transformed into a Net incubator. The stock rose to $138 in late 1999, but has nosedived to around $1.47.

After taking over as CEO, McMillan lopped off large chunks of debt that were set to come due this summer. He helped restructure a $220 million note owed to Compaq and retired $375 million in convertible preferred stock, using a mixture of cash, stock, and forgiveness in both cases.

With the debt tangle sorted out -- at least temporarily -- McMillan is turning his attention to CMGI's remaining companies. By 1999, Wetherell was seeding 80 companies. Then the bottom fell out, and by September, 2000, CMGI had pared its roster to nine.

BIG DOUBTS. Those survivors have been grouped into three categories. In e-biz and fulfillment, there are SalesLink.com and auction site uBid.com; software and services includes six companies, led by search engine AltaVista; and managed-applications services has just one -- the listed Web hoster Navisite, which CMGI decided to keep after it couldn't find a major investor last year.

A look at the CMGI's numbers raises doubts that even the most powerful turnaround wizard could work magic. It lost $5.7 billion in the year ending July 31 and expects to lose $165 million to $175 million this year. The company has pushed back its projection for profitability on a pro-forma basis (excluding charges related to depreciation, amortization, long-lived asset impairment and restructuring) to the first half of 2003 from the end of 2002.

Last September, CMGI predicted that sales for the current fiscal year ending July 31 would top $1 billion and that it would end the year with $325 million in cash. Now the revenue projection is down to $825 million and the cash projection to $275 million, partly due to payouts to reduce debt and spending to build uBid.

"CONTROL/ALT/DELETE." As CMGI's stock price hit the cellar, analysts have stopped covering it. Only one investment bank, US Bancorp Piper Jaffrey, still follows CMGI, down from a field of 16 more than a year ago. (And that remaining research house has a hold rating on the stock.) While others may wish McMillan well, they aren't optimistic that he can triumph over market forces. "Control/alt/delete should be [CMGI's] corporate strategy," says Steve Frankel, a managing director at Adams, Harkness & Hill in Boston.

Talk to McMillan, though, and his can-do spirit is almost convincing. He promises to do just about anything to help his executives win customers. He puts a premium on nurturing talent. And there's his accessibility. The 47-year-old says the idea of being at the center of things was inspired by a visit years ago to the Bear Stearns trading floor. Then-Chairman and CEO Alan "Ace" Greenberg was sitting in the midst of the commotion. "What stuck in my mind was a really good leader is in the front tank, not the back tank," says McMillan.

An advantage to having McMillan in command is that he has had plenty of experience in several of CMGI's businesses, including consulting and direct marketing. Before working at BMG Direct, he was chief operating officer and chief financial officer of Renaissance Solutions, an information-technology and management-consulting firm. He has a law degree and MBA from Harvard University and a B.A. in economics from Stanford University -- all with honors.

"IF YOU CAN THINK..." If he's so smart, what's he doing at CMGI? McMillan says he loves the intellectual challenge of trying to turn money-losing companies into viable businesses. Compensation is secondary. "I'm far more interested in what is the potential of this business and where can I take it," he says. "These sectors are very fluid, very problematic. If you can think and implement your way through this environment, you've done great work."

Each of McMillan's companies -- none of which is profitable -- faces a tough challenge. CMGI's best performer, auction site uBid, is a distant second in revenue to eBay in online auctions. And the business model for uBid -- which auctions other companies' excess inventory -- is less attractive because it owns and ships much of what it sells. Shipping computers and consumer electronics means razor-thin margins. By contrast, eBay's sellers own the products and handle the mailing.

CMGI's success seems to be riding largely on its e-biz segment. The division contributed 73% of the company's $211 million in revenue in the quarter ending Jan. 31. "The negative is that CMGI today is dominated by its e-biz/fulfillment operation, and even at profitability, that's a low-margin business," says Frankel of Adams, Harkness & Hill.

A LIQUIDATOR? The other companies in CMGI's stable have yet to build viable businesses. E-consulting firm Tallan is fighting for share in a contracting market. A November survey by Forrester Research showed that 60% of 3,500 global companies queried expected to cut their spending on consultants by an average of 29%. A majority of those who will continue to spend will likely to turn to more established players such as IBM and Accenture as the shakeout among the e-consultants continues.

"Customers want to deal with the Big Five. They don't want a specialty shop," says Frankel. McMillan says Tallan has been able to hold its top and bottom lines through the turmoil, though CMGI doesn't break out company figures.

How many of CMGI's nine companies will make it? Analysts say the ultimate irony of this saga may be that a company that once focused on helping other companies grow, ends up running a liquidation business through uBid. But even building up a thin-margin business would be a fat victory. Keenan is a correspondent in BusinessWeek's Boston bureau


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