Private equity firm Apollo Global Management will take Rackspace private in the all-cash deal.
After cracking under the weight of its bricks-and-mortar store, Egghead hatched a plan to salvage the company as a pure-play. The 16-year-old company that once tried to be everything to everyone is now zeroing in on business-to-business sales. And with a new strategy and a new partner, Egghead.com is ready to cross the profit threshold.
Seated in the front car of Egghead’s decade-and-a-half-long roller-coaster ride is George Orban. Orban began his involvement with the company as an investor and board member; he has been the CEO and now serves as co-chairman. The ride began in 1984 when Victor Alhadeff launched Egghead in Seattle as a storefront software retailer. Not having a retail background, Alhadeff struggled to raise money for the new company. At the same time, Orban-with an extensive retail background-was considering starting a chain of PC oriented stores. An investment banker talked Orban out of his plan in favor of investing in Egghead. In 1985, Orban joined Egghead as investor, advisor and director. That same year, Egghead attracted more investments and was primed to grow. “Its curve intersected with the steep curve of software demand and interest in PC products,” Orban says. “The company grew faster than management’s ability to control the business. It hadn’t put into place the infrastructure to support what had become a very complex business.”
At its peak, there were 280 stores; an outbound sales force that sold to corporate, government and educational entities; and a catalog division. Between the late 1980s and the mid-1990s there were several management changes, “none of which did a particularly effective job,” Orban says. By 1995, the revenue base stalled and the company fell into a crisis. The board sold the direct sales arm, which included the corporate, government and educational business. The remaining resources were concentrated on the troubled retail business. At that point, Orban, who worked for The Sprout Group of Donaldson, Lufkin and Jenrette as a venture capitalist on Wall Street, became Egghead’s chairman, and shortly thereafter CEO. “It became apparent very early on that we had to cut the bleeding in the retail chain,” he says.
Applying a tourniquet
Two months after taking over Egghead, Orban shut down half the retail stores. “Not only did we have to shut down the chain and lay off a lot of people,” Orban says, “but we had to liquidate tens of millions of dollars in inventory.” He then had to figure out what could be built around the remains of the business. There appeared to be two paths: build a larger store prototype and incorporate other PC products or focus the company on the Internet.
The plan became to do both. “You could see what the competition was doing; how Best Buy and Comp USA were evolving with their stores and their bigger offer,” he says. However, the company was saddled with a lot of small stores. Egghead also tried developing its web site, but found it did not have the expertise to master the new technology. Egghead opened a couple larger stores in the Portland, Ore., area with a partner called Surplus Direct. Then in August 1997, Egghead bought Surplus Direct.
Surplus Direct already had a web presence and was building a catalog business; this gave Egghead the resources to move its business online. However, there were still management problems and the new business model was not going to be an easy sell to potential investors-and investment capital was something the retailer badly needed. “We had little credibility as a company, having faltered in the retail business,” he says, adding that it would have taken $4 million to grow the superstore retail business.
Following the Christmas selling season of 1997, Egghead made two major changes. First, it closed all its retail stores to turn its attention to the Internet. Then the money started to roll in. “We caught the wave of enthusiasm over the Internet,” Orban says. “We grew our Internet business so that within the 12 subsequent months we were one of the largest online retailers; our quarterly sales revenue exceeded $40 million. On the basis of that, we raised $80 million in the spring of 1999.” Second, it realigned its focus away from b2c to b2b.
Radical leaps such as shutting stores and going completely online are par for Orban’s life. Orban holds a bachelor’s degree in chemistry, a master’s degree in international affairs from the University of Paris and an MBA from Columbia University. “I was 20 and I just couldn’t see myself cloistered in a lab,” he says. “I wanted to develop a historical perspective. So I immersed myself in the history of the 20th Century.” After completing his international studies degree, Orban, a Canadian citizen, spent five years abroad as a trade delegate for the Canadian diplomatic service. He spent several years with a company with international interests in several areas including retail before heading to Columbia.
With competition heating up on the Internet, Egghead had to quickly achieve scale. The best way to get scale was to team up with somebody in a similar business, he says. Egghead began discussions with Onsale to merge the two operations. Combined, the assets of the companies were very favorable, not only to preserving both companies but also to giving them the opportunity to grow, he says. The two struck an agreement in July 1999. Orban and Onsale’s Co-founder Jerry Kaplan now serve as co-chairmen; Jeff Sheahan was named president and CEO this July.
“One of the things that Jerry Kaplan and I shared throughout our Internet experience was a great deal of cynicism for the value the consumer brought to our businesses,” Orban says. “The consumer was not a particularly profitable customer. We thought the money spent on marketing (by pure-plays looking to establish brand awareness) was egregious and largely unproductive. We both felt the business customer was the best customer.”