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The birth of a B2B giant

GE's decision to shed one of the world's largest electronic trading networks will give Harvey Seegers a chance to prove Jack Welch was right about the potential of business-to-business e-commerce.

During Jack Welch's tenure as chief executive, General Electric spent hundreds of millions of dollars to build a business-to-business e-commerce unit that its then-boss believed was vital to the company's future.

But after Welch's retirement, the new CEO, Jeff Immelt, decided to reshuffle the company portfolio. Late last month, GE sold 90 percent of the B2B unit, Global eXchange Services (GXS), to the technology buyout fund Francisco Partners in a deal valued at $800 million. GE will retain the remaining 10 percent of the unit.

General Electric's decision to head for the exits also puts GXS Chief Executive Harvey Seegers in charge of one of the world's largest electronic trading networks. Seegers has big ambitions for the company, which claims as customers more than 60 percent of the Fortune 500. Once the deal is completed this October, he intends to buy other companies that complement GXS's existing business and prep the company for an eventual initial public offering.

But like nearly every other company involved in the technology business, GXS is grappling with weaker-than-usual demand. First-quarter revenue declined 38 percent, to $105 million, from $170 million a year earlier.

CNET News.com caught up with Seegers following the announcement of GE's deal with Francisco Partners for a conversation about the future of GXS and the market for B2B services.

Q: In explaining the sale, GE said GXS doesn't fit into the company's core services and growth strategies. So help me understand that decision within the larger context of General Electric. When did it become apparent that there wasn't a match?
A: I think you have to go back to the leadership change (at GE). When Jeff Immelt came in, he did what all new CEOs do: He re-evaluated the portfolio. He saw...that having an IT services business like us didn't fit in.

When Jeff Immelt came in, he did what all new CEOs do: He re-evaluated the portfolio.
Do you think (former chief executive) Jack Welch would have agreed with that plan had he still been at the helm?
There's no way of knowing.

It reminds me of the spinout of EDS (Electronic Data Systems) from General Motors. Is the lesson here that you can't have two very different corporate missions under the same roof?
I think the bigger lesson is that in bigger corporations, with predominately $5 billion to $10 billion businesses, it's very difficult for units with revenues of less than $1 billion to still receive the same attention other businesses do.

Will Francisco Partners have any operational role at GXS?
They'll have no operational role at all. They are investors and a source of best practices but they will not be involved.

Now that you're going to be running the show, do you have a different vision for GXS or will it essentially be a continuation of current policy?
I think we will be more aggressive. We want to remain clearly in the B2B e-commerce services space, but within that market definition, you'll see us more aggressively acquire other companies that enhance our capabilities.

Can you be more specific?
One of the great things about being a new private company is that we'll have our own freestanding private equity to bring in some technology experts who previously wouldn't be interested in working for us because we were part of a larger company at GE.

As part of GE--which you will continue to be until Oct. 31--you are part of a very well-capitalized operation. After the sale, will you need to go to the public markets to compensate for the loss of those deep pockets?
The answer is yes. Assuming the equity markets are receptive to IPOs, I think in three to five years we'll take the company public.

Once GXS is on its own, what's going to be the biggest challenge facing your team?
It really has nothing to do with being on your own. The biggest challenge will be to successfully and quickly integrate the acquisition. That will be a big challenge. We'll be bringing all the best practices of GE, and they have had a pretty good track record. There's an acquisition-integration framework that was put together by GE Capital and that will be the road map we use.

I don't see a clear path toward getting industry agreement on any XML standard.
Since you provide e-commerce solutions, let's talk about that. The original vision at GXS was to get out ahead of the B2B market and market e-commerce software and services. But B2B has taken a hard knock this last year and a half. Is it being rightly criticized for over-promising and under-delivering?
Yeah. When we speak generically, I think the sector absolutely deserves the kind of criticism it has been receiving. But it's important to distinguish where the criticism should be directed...A lot of the companies that deserve criticism are those that spent on marketing and overpaid on acquisitions. There was a lot of over-promising and a lack of understanding of this domain complexity.

You've criticized the idea of public exchanges, saying they were doomed to failure. Do you still believe that private exchanges have a stronger future?
I feel very strongly that private exchanges have a bright future. Even while companies tried to figure out the public-exchange game, we were investing in private exchanges. The private domain we run for GE has 40,000 suppliers, and this year GE will buy $20 billion in goods and services using the private exchange GXS.

With a new financial crisis du jour--or so it seems--how much more difficult is it to get chief information officers to sign on the dotted line?
It's really interesting. This used to be the exclusive province of the CIO; now we're seeing the COO (chief operating officer) and CFO (chief financial officer) being the decision makers. I would say that the sales cycles are just as long as they've been in the last 12 months. The recent months are not making things worse, but they're not making them any better either.

Your revenue came down in the first quarter from $170 million to $105 million. It doesn't sound as if the turnaround has arrived.
Keep in mind that our Q1 includes substantial divestitures so you don't have a revenue-to-revenue comparison. We're not in need of a turnaround. In the last four years, our e-commerce business has doubled.

What about the macro e-commerce turnaround? What's your expectation for a pickup?
You'll see it as a lagging indicator when the economy starts hitting on all eight cylinders. That's probably six to 12 months away.

What do you think is going to be the biggest technology story in e-commerce over the second half of this year?
You'll see and read a lot about Web services. But there'll be a lot of talking and not much walking. I think you'll see the continued fragmentation of XML. It won't be the lingua franca that everybody hoped it would become.

Do you think the intervention of standards bodies can help by finding a resolution to the infighting?
I'm afraid that I'm not that optimistic. I don't see a clear path toward getting industry agreement on any XML standard.

Since everyone's being asked to peer into their crystal ball these days, I'd like you to look into yours: When will the e-commerce market snap out of its doldrums and what is it going to take?
The rebound in the country will be first. As much as we in the IT world would like to wish it away, companies still think that IT spending is a discretionary expense. There is something else that we and other industry players have done which is cause for optimism: Technology has made it much more cost effective for third- and fourth-tier vendors to do business electronically. Hopefully, the story is that small to medium-sized enterprises come online like their larger counterparts.  

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