Leading College Web Site Runs Out of Options

SAN FRANCISCO (08/22/2000) - It is not supposed to happen this way. The strong dot-coms should survive. On Tuesday, however, a college-oriented Web site with almost 3 million registered users and millions of U.S. dollars in financial backing released details of its fall into bankruptcy and the planned acquisitions of most of the site's assets.

CollegeClub.com Inc. Tuesday outlined the planned acquisition of the company by Net educational content and commerce specialist Student Advantage Inc. with the initial figures in the deal set at US$7 million in cash along with 1.5 million shares of Student Advantage stock. Up to $5 million may also come CollegeClub's way from Student Advantage if the vendor meets specific Web site revenue goals over the course of 2001.

The completion of the deal hinges on several factors, including approval by the U.S. Bankruptcy Court in San Diego, California, where CollegeClub, its owner, and various subsidiaries filed Monday for a voluntary petition for reorganization under Chapter 11 of the U.S. Federal Bankruptcy Code.

Almost five years ago, CollegeClub.com began operations and looked to the Internet as a way to attract both students and educators to an online locale with roommate finders, credit card applications, loan services and text book stores -- basically anything a digital-age collegian might need.

Due, in part, to an aggressive marketing campaign and user satisfaction, the site began attracting customers at a swift clip. At last count, College Club boasted 2.9 million registered online members and a place among the 50 most visited Web sites in the US, according to the company's numbers.

The good times for CollegeClub continued as investment flowed in from venture capitalists, car manufacturers, and media giants alike. By the first quarter of 1999, CollegeClub secured a partnership with WorldCom Inc. that provided users with free access to e-mail via the phone and free voicemail, in addition to the e-mail and paging services the site already provided. Shortly thereafter, CC -- as it is known to users -- raised around $15 million in financing from a group of investors including Convergence Partners and France-based Viventures.

In early January 2000, the company continued to receive attention from both existing and new investors. CC secured $40 million from Seligman Technology Group via the group's investment fund and additional money from previous investors Convergence and Sony Corp. Later deals included partnerships with Ericsson Inc. and General Motors Corp. along with a planned IPO (initial public offering).

Then, CollegeClub hit the organizational and financial difficulties that have apparently made it ripe for takeover. In June, Michael Pousti, former CC chief executive officer, and James DeBello, former chief operating officer, resigned.

In the wake of these announcements, CC went on to rescind its IPO.

While a source close to the company traces the financial difficulties to some unorthodox spending practices by the management, the planned owner of CollegeClub believes that problems stemmed from the nature of the site's business model.

Ray Sozzi, chief executive officer for Student Advantage, said he hopes to use his company's offline resources to support what CC has traditionally done.

"Generally speaking, we don't plan on tinkering too much with what the folks in San Diego have built," Sozzi said.

He did, however, point to a few key areas of improvement necessary for CC to start heading toward a profitable future. First on the list, he cited the need to reduce excess costs -- a feat he hopes to accomplish initially by benefitting from points of redundancy between the two vendors. In particular, Sozzi noted that much of CC's hosting, software and database development overlaps with the assets Student Advantage already boasts.

In the recent past, Student Advantage has shown less than stellar financial performance of its own. Since the beginning of the year, the company's stock price plummeted from a high just over $20 to its current price hovering just above $7. In addition, Student Advantage has continuously met analysts' predictions of negative earnings per share and the company has suggested that a continuation of the negative earnings will endure throughout next year.

Sozzi, however, said that investors continue to knock on his company's door in search of opportunity. "We have proven that we are good at turning relationships into revenue," he said. In support of his claim, Student Advantage announced Tuesday that FleetBoston Bank NA made a $10 million financing commitment.

With Student Advantage planning to let CollegeClub maintain control of the site's operation, the question continues to loom as to how and why CC failed in the past and what measures should be taken to ensure profitable operations in future.

Monte Brem, senior vice president of corporate development at CollegeClub, said that after negotiating with a number of parties over the last two and half months, his company saw a deal with Student Advantage as the most logical step toward profitability -- a goal he claims CC can achieve by the fourth quarter of this year or at least the first quarter of 2001.

Based on his company's model of electronic commerce, CC required heavy amounts of financing in order to keep up with the technological needs and rapid growth of the San Diego-based vendor, according to Brem.

"The business model does work," Brem said. He cited, however, that with nearly 3 million users, the back-end costs for the site ran high and needed multiple rounds of financing for success. "It requires a tremendous amount of scaling to be profitable," Brem added.

He said that CC will look to downsize a number of growth initiatives, including some educational offerings and international targeting. Brem believes that his company has achieved a level of prominence that will allow a reduction in marketing costs, as CC can rely on word of mouth to attract future users. He compared his company's current growth to a viral infection.

Brem also noted that Tuesday's acquisition announcement underlines a trend in offline and online companies joining forces. "CollegeClub will be the focus of Student Advantage's online efforts," he said.

While Brem repeatedly denied rumors of financial wrangling at CC, other vendors closely linked to the site pointed to a shady past. One representative at a former partner of CollegeClub said, "I couldn't give any public comment on the saga that went on at CollegeClub."

Another source close to the company pointed to exorbitant amounts of spending by CC that was a financial drain on its resources.

Even with a troubled fiscal past, CollegeClub plans to retain its partnerships and is currently negotiating how to proceed with these deals.

CollegeClub, based in San Diego, California, can be reached at +1-619-237-7000 or http://www.collegeclub.com/. Student Advantage, based in Boston, Massachusetts, is at +1-617-912-2011 or http://www.studentadvantage.com/.

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