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FreeMarkets loses a major customer

FreeMarkets shares tumble after General Motors discloses it will cancel a major contract.

FreeMarkets shares tumbled today after General Motors disclosed it will cancel a major contract.

FreeMarkets, an online business-to-business auction provider that recently launched a successful IPO, said General Motors has informed the company it will cancel its contract within 90 days. The contract had been set to expire in September 2001.

GM accounted for 17 percent of the FreeMarkets' $13 million in revenues during the first nine months of last year.

Shares of FreeMarkets fell 62, or about 18 percent, to 279.88 after the announcement.

One source close to GM said the news should not have been surprising because GM struck a significant deal with rival Commerce One in November.

As part of that agreement, GM said it will join Commerce One in creating a business-to-business e-commerce site called GM TradeXchange and will take a 19.9 percent stake in Commerce One.

"There were discussions, and FreeMarkets knew the direction GM was taking (before they launched their IPO)," said the source.

"We have not been informed until today that they had any intention they would cancel our agreement," said FreeMarkets chief executive Glen Meakem. "We had not received any verbal comment from GM that our relationship would change."

In its IPO filing, FreeMarkets warned, "We depend on two clients, United Technologies and General Motors, for a substantial portion of our revenues…The agreements can be terminated by the respective clients at any time upon prior notice."

"It's not surprising this happened, since GM has a 20 percent stake in Commerce One," said Rakesh Sood, a Goldman Sachs analyst. "It turns out that one of FreeMarkets' potential risks cited in the (regulatory filing) turned out to be a real one."

Despite General Motors' pending departure, FreeMarkets downplayed the impact.

"We have continued to successfully diversify our revenue base… (GM has) declined to approximately 10 percent in the quarter ended Dec. 31, and we had expected the percentage to decline further in 2000--even had our agreement continued," Meakem said in a statement.

"GM was a significant customer, but they have other customers that will more than compensate the loss of GM. Our financial model won't be impacted," Sood said. He added he does not expect to change his "market outperform" recommendation or earnings estimates.