PurchasePro bombs on <i>Barron''s</i> story; companies trade barbs

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PurchasePro (Nasdaq: PPRO) plunged 19 percent Monday as the company traded barbs with Barron's over a story that questioned the company's business model and valuation.

Shares closed off $3.63, or 14 percent, to $21.50 Monday despite the rebuttal. PurchasePro provides business-to-business (B2B) exchanges and caters to small- to medium-sized businesses. The company garners revenue from subscriptions, software licensing and hosting.

In an article entitled "Worth the Price?" Barron's argued that PurchasePro's accounting is questionable and flagged the company's inability to retain deals with Office Depot and Sprint. PurchasePro fired back with a statement claiming the Barron's story was "riddled with inaccuracies and innuendo." Many analysts said the Barron's story was off on a few points, but much of the spat focused on different shades of gray.

The stock gained recently as Morgan Stanley initiated coverage of the stock. In addition, the company said last week that AOL Time Warner (NYSE: AOL) expanded a partnership.

"Barron's article does not present any new information and misrepresents several facts," said SG Cowen & Co. analyst Ping Yu in a research note. Yu reiterated a "strong buy" rating Monday and said any weakness in the shares represents a buying opportunity.

"We feel our story was fair and accurate and time will tell whether we were right," said Richard Rescigno, managing editor of Barron's. He said he wasn't aware of any misstated facts, such as a claim that the company did not have a chief financial officer. Rescigno added that PurchasePro had been reluctant to talk to Barron's for months, not just in the quiet period ahead of its fourth-quarter report.

The primary point of contention about the article was a claim that PurchasePro is losing partnerships with Office Depot and Sprint. In a statement, PurchasePro CEO Charles E. Johnson Jr. refuted that claim and said business is ongoing even though the deals have expired. The truth is in the middle.

Under the deals with Office Depot and Sprint, PurchasePro was to offer their customers B2B services. Ideally, Office Depot and Sprint would be able to grow the base of PurchasePro's B2B network. Johnson has said that PurchasePro hopes to become the AOL of B2B.

As for the worries about the Office Depot and Sprint deals, Lehman Brothers analyst Patrick Walravens noted that Office Depot's $1 million a month payments to PurchasePro ended Jan. 31. The companies are still working with PurchasePro.

"I think the company would admit that the partnerships didn't work out the way they hoped it would," he said. But blaming PurchasePro for the outcome of the Office Depot deal isn't completely fair, said Walravens, who noted that Office Depot has struggled, and the management team that forged the PurchasePro deal is gone.

The Sprint deal has similar circumstances; the failed merger with WorldCom was a distraction that limited the PurchasePro deal.

"Some claims were legitimate," said Prudential analyst Timothy Getz, who rates the stock a "strong buy."

As for the article's reference to bad management, Getz said, "it’s a management team that's never built a company of this size, but on the other hand they've outperformed expectations." Barron's also made reference to the company's lack of a CFO. Johnson said PurchasePro had CFO James P. Clough, but the company has been public about its search for a more experienced candidate.

According to Walravens, Clough "understands the business and knows the securities laws, but hasn't been a CFO at a company before."

PurchasePro also had other problems with Barron's.

  • PurchasePro said its financial statements follow generally accepted accounting principles.

  • The company said entrepreneur Steve Wynn did not pay off any notes for Johnson or PurchasePro. His total capital contribution to the company was insignificant, comprising $50,000. His equity position was repurchased in the first quarter of 1998.

  • PurchasePro denied it was changing its business model to sell software.

  • Johnson admitted he did secure a line of credit using his PurchasePro stock as collateral, a move Barron's equated with "the next best thing as selling shares." But Johnson said the amount used on the line of credit does not approach Barron's $100 million figure.

    Analysts agreed that the PurchasePro worries could clear up with a strong fourth-quarter earnings report a week from today. "Once you put the shouting aside, it'll come down to how the quarter is," Walravens said.

    PurchasePro is expected to report a loss of a penny a share on sales of $29.5 million.