Microsoft Makes a VerticalNet Leap

Microsoft Corp. has gone vertical.

The software giant forked over $100 million for a 2-percent stake in VerticalNet, which operates Web sites that provide content for firms in dozens of specialized industries from industrial equipment to solid waste.

The deal marks the second time after Healtheon/WebMD that Microsoft has taken an equity stake in a firm that operates online marketplaces. Most of its activity around Internet marketplaces has focused on partnering with technology vendors who provide plumbing and wiring for them.

Laura Jennings, Microsoft VP of worldwide strategic planning, says VerticalNet was attractive for its broad presence in many industries and for fitting in well with Microsoft's business-to-business strategy. "What VerticalNet had that interested us is a focus on small- to medium-sized businesses," says Jennings.

The deal calls for Microsoft to pay for 80,000 small firms to create storefronts they can use to sell products via VerticalNet. The idea is to use Microsoft's muscle and technology to drive small companies to its new partner.

"We're essentially going to blow out critical mass on the supply side," boasts VerticalNet cofounder and executive VP Mike Hagan. He says Microsoft will spend "tens of millions of dollars" on a branding campaign to promote the relationship and that it will add $200 million in revenue to VerticalNet over three years.

News of the deal with Microsoft Friday sent Vertical Net's stock soaring $58 to close at $252. Since it went public last February, the company - which has a market capitalization of about $7 billion - has been one of the few ways for public investors to get in on an emerging generation of Internet marketplaces.

But not everyone thinks Vertical Net is a b-to-b paragon. Critics contend it's not much more than a glorified publisher of trade magazines, merely providing lots of industry content but not automating complex business processes at the heart of its vertical industries.

Hagan has heard that critique before, and believes "It's unfair to say people just log on and read industry news."

Microsoft's Jennings says, however, that "there is truth to that" comment. "But I don't think their focus on information is a negative." Rather, she thinks that VerticalNet's job listings and other content help create a valuable community in various industries.

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