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VerticalNet sells exchange, turns eye to software licensing

The operator of business-to-business exchanges sells its electronic and computer components exchange to technology marketplace Converge in exchange for a 19.9 percent share in the company.

VerticalNet, an operator of business-to-business exchanges, sold its electronic and computer components exchange, NECX, to technology marketplace Converge in exchange for a 19.9 percent share in the company.

Converge also agreed to give VerticalNet a seat on its board of directors. Under a separate agreement, Converge will pay $107.5 million over three years to license VerticalNet's software and to provide consulting services, the companies announced Tuesday.

Licensing software to market and exchange operators is a strategy that VerticalNet intends to charge into, VerticalNet executives said.

"VerticalNet reached one of those moments that the company we once were is no longer the company we want to be," said VerticalNet co-founder and chief operating officer Michael Hagen.

VerticalNet serves 57 industries, with sites such as Food Online and Solid Waste.com. The business unit also provides suppliers and buyers with industry-related content and resources.

Converge, which launched in May and was formerly known as eHitex, is an exchange that handles about 180 product groups.

VerticalNet chief executive Joseph Galli said the NECX deal will transform the company into a software provider, giving it an "elegant streamlined business model." The company still operates Internet marketplaces and garners online advertising, but Galli clearly emphasized software.

"This is a validation of our software," Galli said. "Our technology has been underestimated. Converge did the due diligence and picked us."

Because of the NECX sale, VerticalNet will probably take a revenue hit. Of VerticalNet's $75.3 million in third-quarter revenue, NECX accounted for $39.3 million of that sum. Galli would not give a projection for the fourth quarter, however Chase Hambrecht & Quist analyst Jim Pettit said he expects revenue for 2001 to fall from $430 million to $450 million, to $200 million to $225 million because of the NECX sale.

Although NECX, which was acquired in December 1999, boosted revenue, Galli said software licensing would deliver more of a "quality revenue stream." Although revenue will fall in the short term, Galli said he expected software revenue to scale in 2002.

As for the competition against Commerce One and Ariba, Galli said it is still early in the game, and the market should be large enough to accommodate many business-to-business software players as exchanges proliferate. According to Credit Suisse First Boston estimates, the number of public and private exchanges will balloon to 1,500 in 2002 from 270 at the end of 2000.