Divine Acquires BlueVector, Almost –

Like a rooster with an over-inflated ego, incubator-cum-software firm Divine Inc. executives crowed high and low last week that their firm was “loaded to bear” after acquiring several assets from struggling Internet consultantcy MarchFirst Inc. Contained within the laundry list of supposedly purchased assets was MarchFirst’s now-defunct VC arm, BlueVector. But even if that part of the deal passes muster with anti-trust regulators, Divine may not end up with the complete package after all.

The problem is that, contrary to published reports, MarchFirst did not own 50% of BlueVector at the time of the sale. Instead, BlueVector’s four former managing partners had a 53% majority ownership of the venture capital unit, while MarchFirst actually only owned 47%, said a source close to the situation.

“MarchFirst had no right to sell BlueVector,” the source said. “The partners had board control forever, and there were certain restrictions on what MarchFirst could or could not do with its shares. If they’ve sold anything, they’ve sold their shares, not the underlying assets, although Flip has said repeatedly that they’ve bought the assets.”

He added that he didn’t think MarchFirst was being malicious in the way it went about orchestrating the sale, but he did speculate that perhaps no one at the consultancy had bothered to re-read BlueVector’s year-old formation agreement.

MarchFirst initially shuttered BlueVector a little more than a week ago, and its original four partners are no longer working full-time at the firm, the source noted. Its Web site was inaccessible last week, and no one at the firm answered the phone.

Why’d They Do It?

A Divine spokeswoman said that she was aware of the ownership dispute, and that the company planned to conduct further due diligence before attempting to complete the BlueVector portion of the deal. Pending regulatory approval, BlueVector and its portfolio which include several corporate deals and about $38 million worth of other investments are slated to be absorbed into Divine’s VC subsidiary, Divine InterVentures. The company expects the deal to close, but the exact date is still up in the air, the spokeswoman added.

The acquisition of a VC arm poses a bit of disconnect for Divine, however, as in February it abruptly dropped “InterVentures” from its corporate masthead and announced that it was no longer going to operate under an incubator/operating company model. In its current incarnation, the firm is extremely acquisitive, and has been targeting companies that fit a strategy of providing businesses with Internet portal construction software and services.

Moreover, the spokeswoman said that Divine’s VC arm isn’t terribly active anymore, which isn’t surprising considering most of its former progeny have either become crash-and-burn IPO sob stories or have long since run out of cash. In fact, Divine last November decided it wasn’t going to pump nearly as much capital into any new or existing investments, opting instead to buy up struggling or undervalued companies at bargain-basement prices, and then consolidate them in a life-saving effort.

A Real Bargain

Amid widespread speculation that MarchFirst is little more than a lame duck at present and will likely kick the bucket within the year, it seems that, despite its new moniker and strategic identity, Divine hasn’t drifted too far from that buy-em-out, roll-em-up strategy.

“There’s a lot of misinformation circulating because this deal was done so fast,” said a source familiar with the situation. “MarchFirst didn’t have a lot of choice. The only guys willing to do this deal fast were Divine, so MarchFirst said take whatever you want. BlueVector was lying around, so they probably said let’s take this thing, too. Who knows, it could be an upside.”

Since Divine got first dibs on what is likely to be the first of many MarchFirst divestitures, it essentially looted what it perceived as the best and most valuable parts of the business. In addition to BlueVector, Divine also acquired approximately 20 MarchFirst offices, MarchFirst’s Denver-based software implementation business and its HostOne managed service provider business, although that part of the deal is still subject to regulatory approval.

Additionally, Divine will bring on board about 2,100 former MarchFirst employees, most of whom were hand-selected, Flip said in a recent investor conference call. Moreover, the company has purchased $130 million in receivables, and does not plan to absorb any of MarchFirst’s debt or liabilities, he said.

The new operating subsidiary will be called Divine/Whittman-Hart, and will provide a slew of enterprise technology, hosting, e-business strategy and branding services, according to a statement Divine released last week.

Divine did the entire deal for an up-front cash payment of $10 million, with a $60 million balloon note payable in five years. There also is a possibility of an additional $55 million payment if the cash flow and profitability of the acquired assets exceeds performance expectations, but that’s highly unlikely, said MarchFirst CEO Andrew “Flip” Flipowski during a recent conference call.

Is It Going To Live?

The question is, will MarchFirst be around long enough to see that payday? It’s no secret that the company, which was the result of a 1999 merger between Whittman-Hart and San Francisco-based USWeb/CKS, is running out of money. Despite receiving a $150 million cash infusion from private equity firm Francisco Partners earlier this year, as well as a second extension to repay a $53 million loan from Bank One‘s America National Bank and Trust Co. of Chicago, the company’s financial woes persist. Its stock has plummeted from a high of $80 per share to close at tktk at the end of trading last Thursday.

Needless to say, MarchFirst’s tune has changed drastically since the end of January, when it said that the $140 million in cash it had in its coffers would be enough to sustain it through a proposed turnaround. Since then, former CEO Bob Bernard has abandoned the company’s helm, and it has installed its third chief financial officer in less than a year.

Barely limping along in the wake of such management shakeups and embattled by the dramatic downturn for Internet consultants caused by the foundering economy, MarchFirst announced last week that it had laid off 1,700 employees roughly 30% of its workforce and was actively pursuing the sale of additional business units. Further, it also said it has closed its Australian office as it weighed further financial options.

MarchFirst had been mum regarding rumors of the layoffs for weeks prior, so much so that Nasdaq briefly halted trading of the company’s stock a few weeks ago and submitted a request for further information. MarchFirst’s shares resumed trading a few days later.

MarchFirst did not return repeated calls for comment for this story.