Surviving the New Economy
He soared, he crashed, he merged. Then his new parent went bankrupt. Should he buy his company back?
Published October 2003
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COMMENT ON THIS ARTICLEIt was the fall of 1999, and Sunny Vanderbeck was on top of the world. Just three years earlier, he had founded his first company, a Web-hosting outfit called Data Return. Now, here he was in the Manhattan offices of Bear Stearns watching shares of his company trade for the first time on the Nasdaq stock exchange. By the time the market closed that day, the stock was at $16, up 25%, and Data Return had raised some $90 million. A night of celebration was in order, but Vanderbeck had other plans: He flew home to Irving, Texas, and went to sleep.
Before the Internet bubble burst, says COO Todd Steitle, "We got a glimpse of what it's like to be a celebrity."
As it happened, it would be his last chance to rest for some time. Data Return shares soared to $92, only to plummet to pennies less than two years later. His company close to ruin, Vanderbeck agreed to merge with another firm, only to see the new parent go bankrupt. That left Vanderbeck with a tough choice: Should he try to purchase the company he founded and take it private? He had poured everything he had into Data Return and was convinced he had a winner. But could he rescue his company from the wreckage of the New Economy?
A precocious computer whiz who graduated from high school at 16, Vanderbeck dreamed up Data Return while in Microsoft's support services division, where he began working after a four-year stint in an Army special operations unit. Vanderbeck, then 24, realized that companies eager to hop on the e-commerce bandwagon would need someone to build and manage their websites.
Scores of entrepreneurs, of course, had the same idea. But from the outset, Data Return did things differently. Rather than plowing millions of dollars into costly data centers (the physical space where servers and hardware are located), Data Return leased space and equipment from partners like telecom networking outfit Level 3 Communications and outsourced other tasks to contractors. "They built a more efficient, more cost-effective business model," says Bill Dering, vice president of investment bank Pharus Advisors, who used to cover Data Return's stock.
Dering wasn't the only one who was impressed. As the company's stock price soared, Data Return became the subject of articles in national newspapers and magazines. These were heady days. At one company party, employees were pulling up in Porsches and Ferraris and even flying in on helicopters. "We got a glimpse of what it's like to be a celebrity," says chief operating officer Todd Steitle.
Then the tech bubble burst, and survival, not stardom, became the order of the day. Vanderbeck dismissed about 300 employees, closed the St. Louis data center, and scrambled for options. With the Nasdaq plunging, raising more financing wasn't promising. That left selling or merging. Divine Inc., a Chicago-based Internet conglomerate, came forward with an attractive proposition. The company, which had purchased some 50 smaller tech firms, had a skilled, 800-person sales force--just what Vanderbeck felt he needed to jump-start his business. What's more, Divine's offer, a 33% premium on Data Return's share price of about 70ยข, seemed like the best deal for shareholders. The all-stock transaction, valued at about $33 million, closed on January 9, 2002. Data Return was merged into Divine's managed services unit and Vanderbeck was named president.
Vanderbeck and Steitle immediately got to work. They launched a major streamlining effort that cut $5 million in annual costs. Jobs were slashed, top contributors were promoted, and business units consolidated. That helped speed up the decision-making process and increased productivity. Revenues reached $60 million, and the business became cash-flow positive.
Unfortunately, Divine wasn't as healthy. The bloated company repeatedly pushed back its profitability projections. Vanderbeck began planning his resignation. But then, on February 25, 2003, Divine filed for bankruptcy protection. Data Return, like the rest of the conglomerate's assets, would be auctioned to the highest bidder. And a stunned Vanderbeck was left to plot his next move. Should he find new investors and attempt to buy the company back? Informally align with another bidder? Or throw in the towel and do something else?
The Decision
Vanderbeck considered walking away. But he decided to wait and see how the auction played out. Who knew? Maybe a white knight would emerge to save Data Return. He and his team also considered raising money to bid for the company themselves, but after consulting an attorney, decided against it. If he lost the bid, he figured, he'd probably be out of a job. If he won, competing bidders could claim that the management team was hostile during the due diligence period and that the auction was invalid. That likely would have sparked a drawn-out legal battle, which would have been a disaster for Data Return.
