When the McKinley Group, publisher of a World Wide Web directory called Magellan, announced plans to acquire Novo Media Group last month, the company marked the occasion with a lavish party, where guests sipped champagne and nibbled smoked salmon at a posh waterside restaurant.
Suddenly, the party's over.
Although co-founders Christine and Isabel Maxwell--the twin daughters of the late publishing magnate Robert Maxwell--and other executives declined to discuss the 3-year-old company's financial condition, former employees, Internet analysts and other sources paint a picture of a company in chaos.
Isabel Maxwell's husband, David Hayden, was abruptly ousted as chairman and chief executive earlier this week. The Novo acquisition is on hold, a critical round of financing is in limbo, half a dozen middle managers have quit and at least one is suing for fraud. Finances are so tight that paychecks bounced and employees had to buy toilet paper and paper towels with their own money, sources said, though a McKinley spokeswoman denied both those reports.
McKinley's troubles offer a cautionary tale on the dangers that lurk in the volatile Internet business. While a few companies--including McKinley competitors such as Yahoo and Infoseek--have already cashed in on lucrative public stock offerings, the fact remains that most companies in the Internet "content" business--as opposed to the business of selling the software and hardware that makes the Internet work--are living on credit and dreams rather than real revenues.
The developments at McKinley are also the latest setback for the star-crossed 45-year-old Maxwell sisters. Their father died mysteriously at sea in 1991, and his publishing empire crumbled immediately amid allegations of fraud and financial mismanagement. This January, their brothers, Kevin and Ian Maxwell, and a business partner were acquitted of conspiring to defraud Maxwell company pension funds in the biggest fraud trial in British history. Kevin Maxwell and several associates face a second trial that's expected to begin next year.
Christine Maxwell, the editorial brains behind McKinley, had worked for her father's Pergamon and MacMillian publishing divisions off and on for 25 years before going into business on her own in 1982. She bought a small electronic database research company in Berkeley called Research on Demand, and that ultimately led her to the Internet.
After launching McKinley with a successful print directory to the Internet, an online version for the World Wide Web was a logical next step. The Magellan product would be more than a simple directory along the lines of Yahoo: At its September 1995 launch, Magellan included lengthy reviews of close to 30,000 Web sites, a four-star rating system and, later, "green light" icons signifying a Web site contained no adult material.
Within months, McKinley--named after the highest peak in the U.S.--scored licensing agreements and other deals with some of the biggest names in the Internet business, including IBM, AT&T;, Microsoft, Netcom On-Line Communications and Europe Online. Partners paid to use the Magellan directory on their own Web sites or hired McKinley's crew of "cyberwriters" for custom work.
The company attracted a number of investors, including Dan Lynch, an Internet veteran and co-founder of CyberCash, who became the family-run company's only outside director. Another investor, Netcom, a San Jose-based Internet services provider, paid an undisclosed sum for a 15% stake in the company. Neither Lynch nor Netcom executives returned calls for comment.
But the bloom didn't last long. McKinley's partnerships generated a lot of press but little cash. According to Hayden, the bulk of the company's revenue comes from ads on Magellan. The Web directory didn't start accepting advertising until February, and in the quarter ended March 31, ad sales totaled just $300,000--compared with $3.1 million for InfoSeek, $2.6 million for Lycos, and $2.2 million for Yahoo, according to WebTrack, a New York-based Web advertising auditor.
According to Hayden, Magellan current ad sales are running at $450,000 a month, mainly due to an increase in traffic resulting from an agreement with Netscape Communications. But McKinley is paying dearly for it, shelling out $5 million for a coveted link from Netscape's "Net Search" Web page. In exchange, Netscape buys ad space on Magellan--and is Magellan's top advertiser.
When Yahoo kicked off a round of stock offerings of Web directory firms this spring, it appeared McKinley would join the rush. News reports from early 1996 named McKinley as a likely IPO candidate, and Hayden said last week that the company was in a quiet period, which normally precedes an offering. But sources close to the company said McKinley's hopes of an IPO faded months ago, when the company failed to interest Wall Street bankers in underwriting an offering.
Investment banker Robertson Stephens & Co. in San Francisco looked at McKinley but ultimately decided to back competitor Excite, according to analyst Keith Benjamin.
"They're late to the game and haven't really had a chance to build a brand name," Benjamin said of McKinley. "It's not clear to me how they can catch up."
Former employees and others familiar with McKinley said part of the reason the company has failed to attract investors is the founders'--and particularly Hayden's--lack of management experience. Hayden was formerly a real estate contractor. His only previous computer experience came in 1991, a year after he married Isabel Maxwell, when he was appointed a director of a software company then known as Sphere Inc. that was owned by a Maxwell family trust. It was later sold to investors and renamed Spectrum Holobyte. Hayden left its board in 1992.
At least half a dozen employees, including middle managers in sales, business development, human resources and editorial departments, have left in the last four months, many because they were unhappy working for Hayden, former employees said. Mike Dantonio, who joined McKinley as head of human resources in October and was fired in January, has sued the company and Hayden, accusing it of fraud and wrongful termination.
Dantonio's suit alleges that he was induced to join McKinley with false promises of stock options and other perks and describes financial irregularities at the company. Hayden declined to comment on the case, which is pending.
Hayden is one of several reasons McKinley's intended acquisition of Novo Media Group, a San Francisco media company that built Web sites for American Express and Toyota, is on hold, Novo President Kelly A. Rodriques said.
"I felt like the board and CEO had to be people with experience, and I didn't see that," he said. A McKinley spokeswoman wouldn't comment on Novo or related financial deals. Kenneth Grunzweig, a computer industry veteran who most recently was president of TravelNet, was named to replace Hayden this week.
Even as McKinley struggles with management and financial problems, its mainstay directory is suffering. Internet analysts doubt McKinley's system of reviewing and rating Web sites can keep pace with the explosion of content on the Web.
"The infrastructure needed to make it happen is unwieldy," said Allen Weiner, Internet analyst with Dataquest in San Jose. "It's the kind of thing where the actual proof is in the product, and the actual proof is they don't have the people to make it run."