B2B Auction Firm Shoots To Raise $70 Million

Online auctioneer FreeMarkets, Inc. will attempt to raise as much as $70 million (US$) from an initial public offering.

The Pittsburgh, Pennsylvania-based business-to-business auctioneer specializes in helping companies sell items such as industrial equipment and raw materials over the Internet.

In its filing with the Securities and Exchange Commission, FreeMarkets did not disclose how many shares it intends to sell or what price it would be asking. The $70 million figure for the maximum proceeds was an estimate used to calculate the SEC registration fee. Additional information is expected in subsequent filings.

FreeMarkets intends to use the money raised for operating expenses and general purposes.

Growing Niche

Industry analyst Forrester Research, Inc. predicts that business-to-business e-commerce will grow from $109 billion this year to $1.3 trillion in 2003 — accounting for 90 percent of all e-commerce.

Last year, FreeMarkets helped organize auctions that generated about $1 billion in purchase orders. The company is on pace to exceed that figure this year.

Unlike consumer online auctions that function by driving bids higher, FreeMarkets’ auctions are downward price auctions. In this model, suppliers continue to drop their prices until a sale is finally made.

Risk Factors

FreeMarkets will continue to spend significantly more cash than it generates. “We expect to continue to experience significant negative operating and investing cash flows for the foreseeable future,” the filing pointed out.

In addition, FreeMarkets feels that its online auction business depends primarily on its two largest clients, United Technologies Corp. and General Motors Corp.

“These two clients represented 77 percent of our revenues in 1998 and 65 percent of our revenues in the six months ended June 30, 1999,” the filing said.

FreeMarkets noted that it might not be able to keep either client in the future.

Tough Competition

While industry observers concede that business-to-business online auctions have great potential, they also point out that the niche is becoming more crowded with every passing day.

Such companies as Horsham, Pennsylvania-based VerticalNet, Inc. and Canadian-based Ritchie Bros. Auctioneers, Inc. have already staked out the online industrial auction marketplace. In 1998, Ritchie Bros. pumped out earnings of $24 million on revenue of $95 million, while VerticalNet showed a loss of $13.6 million on revenue of $3.1 million.

Analysts also feel that because of the nature of the Internet, there is little to stop a continued proliferation of business-to-business online auction Web sites.

About FreeMarkets

Founded in March of 1995, FreeMarkets operates primarily in the United States.

CEO Gary Meakem holds about 12.6 percent of FreeMarkets’ common stock. Meakem, 35, was formerly a manager at General Electric Co. and an associate with the management consulting firm of McKinsey & Co.

FreeMarkets retained Goldman, Sachs & Co., Morgan Stanley Dean Witter, Donaldson, Lufkin & Jenrette and Wit Capital Corp. to underwrite the IPO. The company plans to trade on the Nasdaq Stock Market under the symbol FMKT.