MarchFirst warns of cash shortfall

The Net consultant's current cash resources coupled with existing sources of liquidity will not be sufficient to fund anticipated short-term cash needs, according to the company's 10-Q report filed late Monday with the Securities and Exchange Commission.

As stated in the filing, MarchFirst will need approximately $50 million in additional financing through the end of this year and another $50 million in early 2001 to refinance its existing bank facilities and to meet the company's liquidity needs for the foreseeable future.

Separately, Chicago-based MarchFirst said Monday that it is offering employees a stock reissuance plan in hopes that they won't march away.

Beginning next month, employees will be allowed to return outstanding stock options to the company for cancellation. Then, six months after the return, MarchFirst will issue employees one new option for every three canceled, and the value of the new options will be based on an average of the stock's high and low prices on the day they are issued.

MarchFirst shares, which have lost nearly half their value this month, closed down Monday at $3.06. The company, created from the merger between management consulting firm Whittman-Hart and Net consultancy USWeb/CKS, had seen its stock trade as high as $81.12 per share during the year.

Just last week, MarchFirst laid off about 1,000 employees, or about 10 percent of its work force, in an effort to trim costs and streamline operations. As a result of the reduction, the company has said it plans to save approximately $100 million annually, beginning next year.

With the stock reissuance program, the once high-flying company is hoping to boost morale and retain remaining employees during tougher times. But the moves may not be enough to keep the company's head above water, according to one analyst.

"MarchFirst is going down the tubes," said Tom Rodenhauser, an industry analyst who heads Consulting Information Services. "It's questionable whether (MarchFirst) has the ability to revive itself."

But Lehman Brothers analyst Karl Keirstead said in research notes that although MarchFirst's borrowings from loan agreements, credit lines and Microsoft, an investor in the company, have increased by roughly $45 million, the company shouldn't have problems obtaining the necessary cash.

"The company is reviewing proposals and in our view is highly likely to tap additional funding," wrote Keirstead, who will review his earnings projections and price targets after MarchFirst's analyst call slated for Nov. 28.

Salomon Smith Barney analyst Christopher Paul also said in notes that MarchFirst likely will obtain the necessary funding. But, while the company is attempting to balance employee retention and dilution with the new stock-reissue plan, it's unclear whether the program will have much of an effect, he said.

"The reset of the exercise price of the options may be attractive to employees, however, the six month time delay makes the retention benefits unclear," Paul wrote. "We anticipate that the company?s employees may have the same reaction."

Industrywide woes
Most Web consulting companies, which help clients with Web development and advise them on their Internet strategies, have taken a beating on Wall Street, largely because of an overall market shift that took most players in the sector by surprise.

Companies in the sector are trudging through a changing market landscape, going from serving dot-com clients to landing lengthier, more lucrative consulting engagements with Fortune 500 clients. In recent weeks, a string of Net consultants including Razorfish and Viant churned out disappointing quarterly results that caused their shares to tumble.

Rodenhauser, of Consulting Information Services, said that MarchFirst's troubles began at inception with the merger of two very different entities.

At the time the deal was announced, a number of analysts turned a cold shoulder on the union, questioning whether the two could easily meld disparate cultures. Another concern among critics centered on merger integration issues, especially since USWeb/CKS had acquired around 40 smaller companies in the course of its history.

"The whole problem with MarchFirst is that it was a roll-up strategy rolled up into even more acquisitions," said Rodenhauser, pointing to USWeb's long list of previous buys. "A consulting firm without a (definite) culture can retain employees by having attractive stock options, but as soon as that goes away, you're left with nothing," he said.

"That?s exactly where MarchFirst is now, and after you throw in the extreme market shift, it's no surprise MarchFirst missed its (earnings) numbers," Rodenhauser added. He predicts the company will have difficulty recovering in a market that is no longer booming, but believes it will survive in some form, whether by putting itself up for sale as a whole or selling off pieces of itself.

In notes, Salomon Smith Barney's Paul said that speculation about an acquisition is inevitable, but that the likelihood of an acquisition is minimal because of certain issues, including an uncertain fundamental outlook; management of growth, liquidity and financing; and pending shareholder lawsuits.

MarchFirst, which also competes in the application hosting market, recently reported third-quarter earnings that fell far below analysts' expectations. The company missed analysts' targets by a whopping 19 cents per share, surprising the Street and sending its shares on a steep decline.

The company, which employs about 10,000 workers worldwide, said it does not expect accounting charges associated with the new stock reissuance program.