The fall of The Industry Standard
Part II: Doom followed IPO spat, high rents, costly systems
PSFT+32.14% program designed to cover payroll, benefits, taxes -- everything to meet a growing company's administration needs. It also bought a customer relationship management program from Siebel Systems SEBL (The Standard is in debt for $3.5 million to the two firms, according to papers filed in connection with its bankruptcy.)That brought the Standard's long-term debt to $70 million, IDG officials said.
Ill-fated forecast
In August, Battelle made a bold proclamation that the company would triple in personnel and grow to $1 billion in sales. Famous last words, as it turned out.
Five months into the Nasdaq's plunge, some staffers called Battelle's vision the "August hallucination" and started questioning his leadership skills.
The company kept buying advertising space. It purchased a few television spots, much to the chagrin of Ann-Marie McGowan, the company's chief operating officer, who had been brought in to cut costs.
McGowan, who remains as part of a skeleton crew, said she was concerned, but she defended many of Battelle's spending decisions. They were made with the approval of the Standard's board of directions, which included the three IDG representatives, McGowan noted. "They had to be in the room when these decisions were made," she said.
So the Standard kept buying billboard space, such as the four-story billboard outside its headquarters. "Welcome to the Epicenter of the Internet Economy," it reads.
Many viewed such proclamations as signs of arrogance. "We've been laughing at that billboard forever," said Mechanic. "The reporters were pretty down-to-earth. They didn't go around thinking they were bad-asses."
IDG officials say the company's spending was lavish with operating expenses at $130 million a year.
But the Standard backed up its spending by delivering the goods.
In October, the magazine published a story by senior writer Gary Rivlin that would go on to win the prestigious Gerald Loeb award for financial journalism, an accolade unheard of for technology magazines. Rivlin was honored for his story on how America Online's in-house mergers-and-acquisition team ran roughshod over the companies with which it made deals.
That same month, Battelle created Industry Standard Europe, an expensive venture that cost millions and involved the hiring or transfer of more than 50 people.
On Nov. 6, the Standard released a 272-page issue. Its cover story talked about how some Internet companies were missing the mark but others were able to do well if they found the right markets.
That's just about when the bottom fell out.
Sliding sales
Within a few months, the Standard saw a 75 percent decline in sales, Battelle said.
"We were prepared for the market to turn down 40 to 50 percent," he said. "We didn't know it was going to get this bad."
The magazine started to lower the bar on sales projections. At first, it saw sales drop 20 percent, so it lowered forecasts by that much. Then they fell by 30 percent. And so on. IDG said the sales could have been much worse, going from $140 million to $40 million this year.
As money got tight, the rift that had opened up between Battelle and IDG began to widen, particularly with respect to Battelle's role.
"I came not to work for Pat McGovern. I came to make a company that he and I agreed upon," he said. "I didn't really work with him day-to-day or week-to-week."
That may have been the problem. One senior IDG executive who declined to be named said IDG had a different perspective, complaining that the hubris of Battelle and the executives at the Standard led to the creation of a spending machine that could not be maintained.
Patelis said the relationship between IDG and the Standard was poisoned from the beginning. And it stemmed from Battelle's desire to make the company independent of IDG.
"The Standard wanted to grow and to be able to raise money, the normal things an entrepreneurial company wanted to do," he said. "I think it just comes down to an ownership struggle."
IDG wanted to rein the Standard in and make it a less independent operation. It brought in Rich Marino from CNet to take over as chief executive in March 2001. Battelle would stay on as an active chairman for Standard Media.
In April, the European operation was eliminated, among cost cuts that included a reduction in staff by about 200 positions. Cuts would continue, bit by bit, for the next several months.
By early summer, as Battelle sought IDG's approval of a $10 million bridge loan to get him through the end of the year, the writing was on the wall, even though IDG at first indicated that it might be interested.
The Standard had received outside funding from a number of sources during its history -- J.P. Morgan and Flatiron Partners were the prime contributors. J.P. Morgan and others were willing to grant a quick cash infusion of $15 million, but IDG wouldn't sign off on it because it would dilute its ownership position. It wanted to retain control over the Standard.
A $10 million bridge loan
In mid-July, Standard Media's board met during the company's latest industry conference, in Carlsbad, Calif., to discuss IDG's proposal for the $10 million bridge loan. Battelle and the board were happy with it, but IDG later asked for concessions. A number of term sheets were written up. Ultimately, the two sides couldn't reach an agreement.
"None of us or the other investors could justify any further investment given the condition of the company," said the executive at IDG, noting that the Standard could not come up with a business plan that would support the usefulness of a bridge loan. In the meantime, Allen & Co., a boutique investment bank, was retained to try to sell Standard Media.
Summer break
On Aug. 13, Standard employees were put on a weeklong furlough, something many other tech companies had done this summer to save money. No one was prepared for what was to come next.
On Thursday morning, Aug. 16, the board met again, on a conference call. Among the participants were McGovern, Battelle, Jerry Colonna from J.P. Morgan Partners, Bill Harding of Morgan Stanley and IDG President Kelly Conlin.
One last pitch was made to secure the bridge loan. It was rejected. Within hours, the news that the Standard was closing rippled through the Internet world.
The vacationing staff members, however, found out while reading the newspapers or watching television. There would be no severance and no benefits. Employees could keep their laptop computers, but that was all they would receive.
"I'm deeply, deeply sorry," Battelle said about the way it was handled. "I only hope others take responsibility for it."
Patelis said the magazine could have survived. Its last issue was 88 pages, still a healthy size for any weekly magazine.
"You don't want to shut down the No. 1 magazine in that space," he said. "I just don't think IDG ever allowed them to heal and get better, be supportive. I think people there felt that."
Staffers were called to the office on Aug. 20, a Monday, to be told that most of them would be laid off. A few reporters, editors and business staff were kept on just in case IDG could find a buyer. A week later, the company filed its bankruptcy papers.
Battelle still believes, he said, that there is heavy interest in the Internet. Now that the shakeout has occurred, the medium will be built up over the next decade or two. The real growth for the automobile industry wasn't in the horseless-carriage stage, he said; it came in later decades when cars were built on assembly lines.
Battelle's dream was that his magazine would somehow rise along with the rest of the industry as it matured. "I think we just went through a very awkward puberty," he said. "Don't you?"