Divine Inc., one of the costlier flameouts of the Internet investing bubble, filed for Chapter 11 bankruptcy protection Tuesday after burning nearly $1 billion in less than four years without ever turning a profit.
GTCR Golder Rauner LLC, a Chicago private equity firm, emerged with a $50 million offer to buy most of Divine’s assets.
Any sale must win court approval.
Divine’s bankruptcy signals the beginning of the end for an aggressive enterprise founded by Chief Executive Andrew “Flip” Filipowski, who tapped a who’s who of Chicago for money at the peak of Internet stock mania to position Divine as the region’s best hope for creating a Midwest mecca for high-tech entrepreneurs.
Instead, Divine blew through a sum as large as those lost by such high-profile dot-coms as California’s Webvan, the failed online grocer.
“It was a high-visibility, high-risk effort,” said Mark Tebbe, a Divine investor and former director whose own company, Internet consultancy Lante Corp., struggled before being sold last year.
“From the beginning, Divine was either going to win big or fail big.”
When Filipowski’s Internet incubator, Divine Interventures, floundered in late 2000, he tried to forge a software and services powerhouse by snapping up more than a dozen cash-strapped companies from Massachusetts to Texas.
Many were pioneers, but all had fallen on hard times after the Internet bubble burst.
“The Internet revolution is still occurring,” said analyst Andrew Schroepfer, president of Tier 1 Research in Minnesota. “But the companies that are going to continue to drive that movement are the bigger firms” such as IBM Corp., Accenture and Microsoft Corp.
Filipowski’s team had hoped to build a company from scratch that they could sell to the likes of IBM–a redux of their successful strategy at Platinum Technology International, a software firm they sold in 1999 for $3.5 billion to Computer Associates International.
But the battered economy, coupled with a scatter-shot acquisition approach, doomed Divine, which struggled even before it went public in mid-2000.
Now Divine is set for a contentious bankruptcy.
Shareholders almost certainly will be wiped out, while creditors may try to block any insider deals by Divine’s managers trying to buy back their companies.
Divine’s operations include a firm in Georgia that provides software and services to manage corporate call centers. In Boston, several software operations include one that pioneered shopping cart technology.
In the Dallas area, Divine operates the former Data Return Corp., which manages corporate Web sites. Analyst Schroepfer said that business has a positive cash flow.
Divine has 1,748 employees worldwide, down from a peak of more than 3,000 last year. In the Chicago area, 281 remain, down from 376 in early February and more than 600 at its peak.
Divine has been scrambling to cut costs while opening its books to an estimated dozen potential buyers during the last two weeks.
The leading bidder for most of Divine’s assets is GTCR, whose founder, Bruce Rauner, is a longtime associate of Filipowski’s.
Rauner was one of Divine’s original directors, although his firm decided not to invest in Filipowski’s start-up.
“We looked at it very closely in 1999,” said GTCR principal Phil Canfield, “and although we liked what the company was trying to do for Chicago, we just decided it was going to be an investment company rather than an operating business.”
GTCR backs entrepreneurs who build businesses by buying profitable competitors in consolidating industries.
Canfield said GTCR signed a letter of intent to buy substantially all of Divine’s assets for about $50 million in cash and other considerations late Monday, just hours before Divine announced Tuesday that it would file for Chapter 11.
The filing, in U.S. Bankruptcy Court in Boston, includes most of Divine’s major subsidiaries except Divine Whittman-Hart, a consulting business Divine purchased from the former MarchFirst Inc. consultancy at the start of Filipowski’s acquisition spree in 2001.
GTCR is looking to pick up where Filipowski’s team left off.
“We think there’s some pretty interesting businesses in there [that] can emerge and grow and probably rebound,” Canfield said. “The company’s been in a liquidity crisis for quite some time. We’d use Divine’s three core businesses [consulting, managed services and software] as a platform to selectively pursue acquisitions.”
The bankruptcy filing buys Divine time to finalize a sale while working to restructure massive claims, which include a $57.5 million note owed MarchFirst creditors in conjunction with the Whittman-Hart acquisition.
Another large claim–this one is disputed by Divine–was filed last month by RoweCom Inc., Divine’s library subscription management subsidiary. RoweCom is trying to recover $74 million that the bankrupt unit alleges Divine illegally transferred from its operations.
Divine said Tuesday that it has about $25 million of unrestricted cash on hand–enough to keep its businesses operating while it reorganizes and completes a sale.
Canfield said he hoped GTCR could complete its acquisition in “a couple of months,” although competing bidders could arise.
Among the big losers in Divine’s bankruptcy likely will be private equity firm Oak Investment Partners, which invested $61 million for a controlling equity stake last year.
Investment banking sources said Oak partner Fred Harman had planned to roll some of his firm’s other investments into Divine. But Oak–not unlike Francisco Partners, a private equity firm that tried to rescue MarchFirst and lost $100 million–underestimated how much cash Divine needed.
When Divine still was bleeding at the end of 2002–precipitating the RoweCom cash crisis–Oak decided not to rescue Divine with another cash infusion because it wasn’t clear how many more millions would be needed, the sources said.
GTCR’s risk is mitigated by Divine’s bankruptcy, which will restructure its debt.
Joseph Piscopo, a retired local software executive and backer of high-tech start-ups, is among the many Chicago-area investors who lost tens of millions in Divine. Large corporations including Dell Computer Corp. and Microsoft collectively lost hundreds of millions.
“[Filipowski’s team] just went overboard and never stopped,” Piscopo said. “They paid too much and they got into a lot of things that never paid off. They’ve been climbing uphill every day of their lives.”
“It was an expensive lesson,” Tebbe said.
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Events leading up to Divine Inc.’s bankruptcy
Divine Inc.’s bankruptcy filing Tuesday follows efforts to keep the troubled Chicago-based firm going during an economic downturn and the collapse of the technology sector.
1999
Nov. 3: CEO Andrew “Flip” Filipowski says that Divine Interventures has raised $400 million in capital.
2000
Feb. 15: Divine doubles the amount it hopes to raise in an IPO to $460 million.
May 26: Divine replaces the lead underwriter of its IPO after the underwriter suggests a more cautious approach due to falling technology stocks.
July 12: Divine launches its IPO.
Nov. 9: Filipowski reveals that Divine will no longer pursue acquiring Internet start-ups. It will focus on buying and combining under-valued companies operating in certain technology sectors.
2001
Jan. 8: Divine shares plunge 35 percent after early investors who were required to hold the stock for a period after the IPO are permitted to sell.
Feb. 13: Divine Interventures Inc. changes its name to Divine Inc. Filipowski says the company will focus on buying software companies that offer technology to help corporations communicate with employees, customers, suppliers and vendors.
March 30: Divine announces it will buy three business units from financially strapped MarchFirst Inc.
Nov. 6: Divine announces it will acquire RoweCom, a library subscription service firm.
2002
April 12: A proxy filing reveals that Divine awarded Filipowski a $400,000 bonus in 2001 despite the company’s poor financial status.
May 21: Divine shareholders agree to a reverse stock split in an attempt to boost the stock price and prevent delisting from Nasdaq.
May 30: Divine announces it will receive a cash infusion of as much as $75 million from Oak Investment Partners and other investors.
2003
Jan. 27: RoweCom files for bankruptcy protection amid allegations that it accepted money from libraries to purchase periodicals for them but failed to pay the publishers.
Tuesday: Divine files for bankruptcy protection.
Source: News reports
