Lisle, Ill.-based divine was one of the fastest-growing solution providers on the 2002 VARBusiness 500. The 3-year-old company catapulted to No. 180 last year after eking its way on the list at 443 the year before, thanks to revenue that nearly quadrupled to $153 million. Last year, divine's future looked so promising that chairman and CEO Andrew J. "Flip" Filipowski, in his annual letter to shareholders, described the company as being "positioned for exponential growth."
It turned out the only thing the company was positioned for was an exponential failure. One year later, divine,which built a portfolio of patents and was buying up IT-services companies left and right,is gone. The company filed for Chapter 11 bankruptcy in February and has already liquidated many of its properties. Divine is perhaps one of the starkest examples of companies that fell off the slippery slope of the VARBusiness 500, where a company that's flourishing one year shows it's a house of cards the next.
In fact, many solution providers of all sizes didn't return to the VARBusiness 500 this year or arrived in worse condition. Among them are EDS VB2, with a stock worth one-third of what it was a year ago; Deloitte Consulting VB22, whose parent, Deloitte Touche Tohmatsu, let its window of opportunity pass to spin off its IT solutions business; and Avcom Technologies VB262, which closed its doors this year after founder Brad Bishop decided the margins were too thin to wait out the downturn.
Suffice it to say, the past year has not been pretty. Not that 2001 was much better, but the expectations for 2002 had changed.
"There was still some hope last year," says Gartner analyst Alex Soejarto. "But that didn't come true. The failures were more spectacular, because I think it was more pointed toward bad management than anything else."
That certainly appears to have been the case with divine. While Filipowski was crowing about the company's bright future, divine's undoing was already under way. For one, the company acquired all, or parts of, numerous financially troubled integrators and ISVs, including Delano Technology, MarchFirst, Northern Light and OpenMarket.
Then the acquisition of RoweCom, which managed magazine subscriptions, brought in a nice dose of cash flow. But it was not managed properly, leading to lawsuits from customers. "In the end, divine wasn't doing as well as it had presented in terms of its cash situation," Soejarto says.
Red Flags
Avcom's Bishop describes it as running on a treadmill whose incline keeps inching up each passing year. Others have characterized the collapse of a company as a slow death. Bills mount. Receivables, too. Business slows. All are signs of slippage
First reaction is often slow: Let a few people go. Then tweak the sales-compensation package. Finally, companies struggling to keep up begin investigating new business models. Or new management teams.
That's what Plano, Texas-based EDS and several other VARBusiness 500 companies did this year. EDS was a victim of bad timing as much as bad judgment. At the moment when public and investor dissatisfaction over corporate malfeasance was peaking, EDS dumped its chairman and CEO Dick Brown and replaced him with former CBS chief Michael Jordan.
Instead of getting a boost, EDS got more bad press when it was later revealed that Brown would receive a $30 million severance package. His golden parachute angered investors, who saw the value of their shares tumble roughly 65 percent in the last year of Brown's reign, while contracts went awry and rivals narrowed the gap between their companies and his.
Perhaps its most vexing woe is the $7 billion Navy Marine Corps Intranet project, which, despite huge capital outlays, will not be cash-positive until mid-2004, the company recently warned. When bidding on the highly sought-after contract in 2001, EDS agreed to defer receiving payment until desktops were rolled out. The problems magnified when it was discovered there were far more legacy applications than originally anticipated.
"This is a very complex undertaking that got delayed beyond its original scope," Jordan commented last month during his first earnings call, though he was bullish on the company's future prospects. "I believe EDS has tremendous potential. "We need a business strategy that differentiates us in the marketplace so we can continue to grow."
In a recent research report, Gartner analysts outlined four possible outcomes for EDS: It struggles for the next 12 to 18 months to build up a cash position; an outside partner gives the company a large cash infusion in some form of alliance; EDS is acquired; or it limps along and becomes a second-tier player.
Analyst Christopher Ambrose says the worst-case scenarios are possible but, in his opinion, unlikely. "EDS still has a fairly solid foundation of business," Ambrose says. "But I don't think you're going to see things turn around overnight."
The Lucky Ones?
Then there were the Web integrators, some of whom were rescued from comeback-wannabe status when SBI and Co. VB270 stepped up to buy key assets from companies that were either bankrupt or on the verge of bankruptcy. In a several-month period, SBI snapped up Lante, Razorfish and Scient. While others shrunk from associating with some of these companies, SBI CEO Ned Stringham says he saw legitimate assets that would serve his company well in any market.
"Talent, clients and technical expertise," Stringham says acidly. "Yeah, we were fools."
T.C. Doyle and Rob Wright contributed to this article
