NECX Sale Sends VerticalNet Lower

VerticalNet, Inc. (Nasdaq: VERT)fell 1/16 to 5 5/16 Wednesday after the company announced the sale of itsNECX subsidiary to Converge, a group formed last May by 15 technologycompanies to save costs by trading over the Internet.

News of the sale of NECX, which operates an online exchange for computersystems and components, sparked a series of analyst downgrades.

In return, VerticalNet will receive a 19.9 percent equity stake in Convergeand a seat on the group’s board. VerticalNet said it will also provide the”technology backbone” for the exchange once the sale is completed.

“This will sharpen our focus on VerticalNet Solutions and on VerticalNetMarkets,” said VerticalNet chief executive officer Joe Galli. “Focusing on these two complementary businesses willenable VerticalNet to continue our rapid growth trajectory while driving ustoward profitability.”

VerticalNet also signed a three-year, US$107.5 million technology contractwith Converge, making the company’s VerticalNet Solutions division thetechnology platform for Converge’s trading operations. Converge will alsolink with the 14 technology-related exchanges operated by VerticalNetMarkets.

W.R. Hambrecht’s Derek Brown, however, cut his rating on VerticalNet sharesto buy from strong buy. “While several potential positives may arise fromthis deal, we believe near- and medium-term risks and uncertaintiessurrounding the VerticalNet ‘story’ merit continued caution from investors,”Brown wrote in a research note.

“Of particular concern, we believe our top- and bottom-line estimates willultimately need to be reduced to reflect this transaction, and we questionthe company’s ability to transform itself into a ‘world-class’ softwareprovider overnight,” Brown wrote.

Prudential Securities and Janney Montgomery Scott also reportedly downgradedVerticalNet following the news.

At Robertson Stephens, analyst Eric Upin maintained a buy rating onVerticalNet, but said the sale means the company must now “significantlygrow” its solutions and markets businesses to make up for the loss ofrevenue from the electronics division.

VerticalNet, Upin wrote, “faces execution challenges on multiple frontsmoving forward.”

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