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THE DAY AHEAD: Tech firms shift strategy to cope with bear market

COMMENTARY -- Tech companies are finding a great way to cope with the bear market -- change the business model and pray investors buy it.

We can hear the conversations now between top tech execs and their advisers.

Head honcho: "Our stock is in the toilet, what is wrong with us?"

Yes man: "Nothing is wrong with us, it's the market. It's the sector. It's everything. Our peers aren't doing any better."

"I don't buy that. Look at our main rival. Why are they holding on to their market cap better than we are?"

"I don't know. What do you suggest?"

"Let's retool the business and be like them."

"But our current model has produced strong revenue growth and we'll be profitable in two quarters."

"So? We need to get our stock up yesterday! We'll reposition ourselves."

"We did that four months ago, boss."

"So what? We'll do it again. Just get the stock up."

And so it goes. That conversation is fiction, but don't be surprised if it's taking place in plenty of companies -- especially the Internet variety.

The examples are piling up -- companies are switching business models in a lame attempt to get investors to like them again. There's a chronic case of the young and strategyless out there. News flash: It won't work -- especially in a bear market and a cyclical tech downturn.

Managing a business based on investor sentiment is a recipe for disaster, but companies are doing it anyway.

VerticalNet (Nasdaq: VERT) sold off its NECX electronics exchange to Converge Inc., an electronics B2B consortium. The company line at VerticalNet is that NECX will do better as a part of Converge.

I don't deny that. But it is odd that VerticalNet chose to dump NECX about a year after it acquired the company. When NECX boosted VerticalNet's top line by a mile for the last three quarters, no one complained.

But when VerticalNet shares went into a freefall, NECX became a problem. VerticalNet wasn't diversified enough. VerticalNet's future was software and marketplaces. Investors didn't understand the model. Etc., etc. Simply put, VerticalNet was looking for a story to sell Wall Street.

Investors still don't understand the model. Here's the evolution: VerticalNet started as a content company, bought NECX and got into exchanges, bought a software company to provide solutions, then touted its three synergy-happy business units. Now it's spinning off NECX to be a software company, leaving it with two units. Any shareholder not tracking the company daily would be confused.

VerticalNet CEO Joe Galli said the company's business model -- we're like Ariba and Commerce One -- is easier to understand. I agree, but that doesn't make it a great long-term idea. Galli, however, denies VerticalNet's move had anything to do with the company's stock price. Yeah, right. Analysts said NECX was straining to hit its growth targets because the electronics component business is volatile. VerticalNet can now hide any NECX problems in the "discontinued operations" line.

If VerticalNet traded at $70 a share, the company would have never dumped NECX.

My hunch is that VerticalNet is selling off a huge chunk of its revenue over a case of Ariba envy. Analysts reckon that the winning B2B model for 2001 will be the software licensing model, so VerticalNet is suddenly a software company. It remains to be seen whether VerticalNet, which so far has three software customers, can upend Ariba and Commerce One.

It all makes me wonder what'll happen to VerticalNet's model when analysts decide software licensing is out for 2002.

At least VerticalNet isn't alone. How many e-tailers have we seen become e-commerce infrastructure companies when they figure out they can't make money retailing? The list gets pretty long. I'm still waiting for those hot e-commerce solutions from Value America.

Take a gander at CMGI (Nasdaq: CMGI). The company had an incubator model that drove shares up into the stratosphere. The IPO market implodes with the Nasdaq and suddenly CMGI wants to be known as an operating company. Bad move, Mr. Wetherell. Your operations need some help -- just look at AltaVista and Engage to name a few lost sheep in the family.

When you listen to CMGI talk about its model, it becomes clear pretty quickly that there isn't one.

Ma Bell is also on the fluid strategy bandwagon. AT&T (NYSE: T) sold us on this dream of conquering the last mile, integrated services and broadband nirvana. The stock plunges and Ma Bell decides to split itself up amid serial profit warnings. Now AT&T is cutting its earnings targets again.

We could go on for days, but you get the idea. You won't see companies with viable business models ripping up their plans based on a bear market. The good companies will weather the storm, work their business model, grab market share at the expense of their rivals and look pretty damn good when the tech sector rebounds.

In the meantime, stay away from those companies that shop at Strategies R Us.TDAIN


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