NECX Sale Sends VerticalNet Lower

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

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

In return, VerticalNet will receive a 19.9 percent equity stake in Converge and 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 VerticalNet Markets," said VerticalNet chief executive officer Joe Galli. "Focusing on these two complementary businesses will enable VerticalNet to continue our rapid growth trajectory while driving us toward profitability."

VerticalNet also signed a three-year, US$107.5 million technology contract with Converge, making the company's VerticalNet Solutions division the technology platform for Converge's trading operations. Converge will also link with the 14 technology-related exchanges operated by VerticalNet Markets.

W.R. Hambrecht's Derek Brown, however, cut his rating on VerticalNet shares to buy from strong buy. "While several potential positives may arise from this deal, we believe near- and medium-term risks and uncertainties surrounding 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 will ultimately need to be reduced to reflect this transaction, and we question the company's ability to transform itself into a 'world-class' software provider overnight," Brown wrote.

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

At Robertson Stephens, analyst Eric Upin maintained a buy rating on VerticalNet, but said the sale means the company must now "significantly grow" its solutions and markets businesses to make up for the loss of revenue from the electronics division.

VerticalNet, Upin wrote, "faces execution challenges on multiple fronts moving forward."