The Big Kahuna Of B2 B Exchanges?

Glen Meakem's FreeMarkets could be one of the few survivors of the bloody shakeout ahead

The fight to lead business into the Digital Age is Glen T. Meakem's second war. While attending Harvard Business School in 1990, Meakem, a U.S. Army Reserve engineer, volunteered to fight against Saddam Hussein in the Persian Gulf. Meakem, today the co-founder, chairman, and CEO of online exchange FreeMarkets Inc. (FMKT), left in the middle of exams and served five months as the leader of a combat engineer platoon.

Now, Meakem is scrapping to become the big kahuna of online business-to-business marketplaces. Expect carnage. With too many marketplaces chasing too few dollars, analysts predict 85% of the 1,000 or so online exchanges to disappear over the next three years. But the 36-year-old Meakem stands to be one of the successes. "FreeMarkets has demonstrated itself as a leader at this stage--and they're well-positioned to extend that leadership," says Timothy Klein, senior analyst with U.S. Bancorp Piper Jaffray.

While most B2B exchanges are stuck trying to attract buyers and sellers, Pittsburgh-based FreeMarkets has staged more than 5,000 auctions and moved $7.6 billion of goods and services since its 1995 founding. FreeMarkets helps corporations and governments manage procurement online--which can shave 10% to 20% off purchasing costs--and also helps suppliers find new buyers. Business is picking up steam: In the quarter ended June 30, 2000, FreeMarkets conducted 1,400 auctions worth $2.2 billion, making it the busiest B2B exchange. Plus, analyst Klein says it's on track to beat third-quarter earnings expectations.

Its closest rival, with a sharply different business model, is VerticalNet Inc. (VERT), based in Horsham, Pa. The Street gives FreeMarkets a $2.8 billion valuation while VerticalNet leads with $3 billion in market cap.

Earnings are another issue. While it was profitable in 1998, FreeMarkets moved into the red over the past 18 months as it invested heavily. However, analysts expect a return to profitability later next year with new customers and an increase in trading volume.

The son of a corporate executive and a stay-at-home mom, Meakem grew up in Armonk, New York. Admirers say he's a big thinker who has always yearned to be a captain of industry. "He conceptualized this company at a time when Netscape had barely been founded," says Marlee S. Myers, a managing partner with Philadelphia law firm Morgan, Lewis & Bockius, which is FreeMarkets' outside counsel.

After the Gulf War, Meakem returned to the career track. He finished his MBA and landed a job with McKinsey & Co. An associate, he worked with companies involved in industrial sourcing and commodities trading. Max Scoular, a general manager at FreeMarkets who met Meakem when the duo worked at McKinsey's Houston office, remembers one incident that illustrates Meakem's leadership skills. One December, Meakem had organized a golf outing for his McKinsey colleagues. Tee time was at 7 a.m. on Saturday. It was sleeting, so most of the players figured they could sleep in. But that morning, Meakem left his compadres a voice mail insisting they play. "He got the whole field of 24 out there, and we had a tremendous time in the sleet and rain," says Scoular. After McKinsey, Meakem moved to General Electric Co. (GE) for a chance to run a business.

Meakem conceived the FreeMarkets idea while plugging away as a manager in GE's Business Development Group. When Meakem learned in 1994 that GE was running an auction requiring suppliers to travel to a hotel ballroom in Pittsburgh, he proposed a startup that would run the inefficient and costly process over the Internet.

GE passed on the idea, setting the stage for FreeMarkets. First he recruited former McKinsey buddy Sam E. Kinney Jr., now FreeMarkets' executive vice-president, to be his right-hand man. The two then recruited Mellon Bank technology guru Vincent Rago, who has since left the company, to build the auction software, and GE colleague Jim Zuffoletti, now a general manager, to line up buyers and suppliers. By the end of 1995 they finished the first version of the bedrock auction software. It lets customers post requests for goods and services, as well as other requirements such as delivery dates. Then suppliers, who are screened by FreeMarkets, bid for the contracts. "Christmas, 1995, we felt like we had landed a man on the moon," recalls Meakem.

Thanks to Meakem's vision of the market and early start, FreeMarkets is in a strong position. But the race to dominate online marketplaces is just heating up. FreeMarkets must continue to grow rapidly while fending off steady assaults by competitors such as market software maker Commerce One (CMRC), and marketplace operators such as VerticalNet and Covisint, the auto-industry exchange. While many of those exchanges, including Covisint, are now in the planning stages, they are expected to be up and running by yearend. FreeMarkets must also broaden its customer base. Two firms, United Technologies Corp. (UTX) and Visteon Corp. (VC), accounted for 21% of its revenue in the second quarter.

FreeMarkets has time, though. After raising $182 million from its initial public offering in December 1999, the company has enough capital to last for about 18 months. That should give Meakem the chance to see if his grand idea can survive the B2B bloodbath and turn a profit.

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