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Hard Lessons

Rumors about the death of eMerge Interactive the upstart Internet-enabled cattle data management and marketing company have been greatly exaggerated. We're well short of being broke and going out of business, says Dave Warren, eMerge chief executive officer, fielding the expected question that's been asked too many times in recent months. Things have certainly changed, however. The company blasted

Rumors about the death of eMerge Interactive — the upstart Internet-enabled cattle data management and marketing company — have been greatly exaggerated.

“We're well short of being broke and going out of business,” says Dave Warren, eMerge chief executive officer, fielding the expected question that's been asked too many times in recent months.

Things have certainly changed, however.

The company blasted on to the scene 30 months ago and went public six months later, generating $130 million in its initial public offering (IPO). That was on top of $50 million already invested in the company.

Spit in any direction, and it seemed that eMerge was there, hiring industry names to be on their team, buying brand name auction and order-buying facilities and spending millions getting into business. All this, while trying to explain to cattle producers and Wall Street what they were in business to do.

At its peak, eMerge employed 360 full-time people. Today, there are 145. During their IPO, eMerge stock brought nearly $80/share. At press time, it was trading near $1.30.

Millions of dollars were poured into innovative technology. These included an interactive management tool for cattle feeders, an Internet marketplace for producers to purchase everything from hardware to pharmaceuticals, infrared health management diagnostics and the exclusive license for a feed additive that reduces the incidence of dark cutters. All these have since been shelved.

Worse, as eMerge stock prices tumbled decimal point over zero, the industry grapevine ran hot with rumors of the company's demise. Consequently, some producers, already wary of big-money newcomers, quit patronizing the auctions and order-buying facilities now owned by eMerge, fearful the checks received for their cattle would bounce higher than a new moon. Common sense may have spawned the notion, but it was exactly wrong.

First of all, stock prices aren't equivalent to fiscal fitness. Despite false impressions generated by the stock price, eMerge Interactive still has plenty of jingle. That includes $60 million in tangible assets, $50 million in stockholder equity, $26 million in cash, 30% equity ownership in Turnkey Computer Systems and, most recently, a 10% equity partnership with Allflex USA — Allflex is now the third largest stockholder.

More importantly, Warren points out, “We're already touching a large percentage of the nation's beef supply through at least one of our company's components (more later).” As well, in 2000 there was data on 9.91 million head of cattle under eMerge management.

Live And Learn

“We had to recalibrate based on a new business environment. The world has changed 180 degrees since we started,” says Scott Mathews, president and chief operating officer since eMerge began. He explains circumstances beyond the company's control, as well as some decisions within their control, forced a shift.

Perhaps the most glaring circumstance is the stock market that nose-dived just as eMerge was ready to launch a second round of public financing.

“As the market tanked, what that means to you as a public company is that you can't go out and raise more money, you can't use the stock as commerce,” explains Mathews.

As for decisions, Mathews admits, “You do dumb things when you don't know. If people don't think you understand their business, then they're not going to give you their business.”

In eMerge's case, Mathews says one of the early criticisms of the company was a lack of cattle expertise. Although about two-thirds of eMerge's total work force was from the cattle business, in hindsight, he says there should have been more cattle industry expertise in the top management positions.

More than anything, Mathews believes the company took on too many different enterprises — interrelated in the big picture but seemingly far-flung and confusing to producers.

“We probably started with too many technologies at the same time,” says Mathews. “We couldn't force adoption as fast as we naively thought we could.”

While they don't admit it, the other reality they underestimated is the beef industry's own weaknesses. The company began with the notion of capturing lost economic opportunity within the supply chain, but many producers still view themselves as being in the cattle business rather than the beef business. As a result, it's been difficult to make folks understand the opportunity.

Rather than figure there might be something useful in Internet technology, plenty of folks are too skeptical to consider it. But most of all, the cattle business is reluctant to admit outsiders, even when they bring millions of outside dollars to use in researching and applying new ideas. Plus, when the economic clouds started cutting dark, some producers who first embraced the company were quick to pull back.

The New, Old eMerge

So, eMerge re-tooled, cut overhead by 46%, restructured its order-buying services and shelved products that weren't making immediate revenue. However, the vision it began with remains.

“EMerge is still an Internet-enabled technology company providing individual animal identification and tracking, data management and cattle supply procurement services to the U.S. beef production industry,” says Warren. “Our mission is to enable the delivery of a large, brandable supply of beef that offers producers new markets and opens the door of new value to the industry.”

What has shifted is the refinement of company focus. These days, eMerge focuses on cattle marketing, both physical and Internet, and tying specific information to the cattle through its individual identification and cattle management system. It also has high hopes for VerifEYE, a fecal contamination identification and removal verification system it developed, which could enable packing plants to reduce significantly the pathogen loads on carcasses. And, it is developing a financial collateral tracking system for use by the lending industry.

Previously, eMerge was spreading its resources across a variety of products, services and applications, Warren says. Now, it concentrates on using its individual animal tracking system and procurement service to facilitate the flow of source- and process-verified cattle into specific beef supply chains.

“If someone is looking for a particular description of cattle, source-verified and managed a certain way, we can look through our network and find it. Our goal is to manage the marketing of the cattle along with their specific information to add value and enable the industry's brand initiative,” Mathews says.

Moreover, with its Premium Auction Model now at work in three states, eMerge has the incentives in place to not only identify a brandable supply of cattle but help develop it.

“We have the ability using our technology to actually develop the supply of cattle customers want,” says Warren. “This allows the industry to develop the supply through the market channels they have already been using.”

Along the way, eMerge continues to market plenty of cattle — 3 million head last year. In addition to 12 order-buying operations, eMerge owns four auction barns, its own brokerage and the Internet and video sale electronic platform it has built from the ground up.

Its Premium Auction cattle — preconditioned, sorted and carrying electronic identification tags — continue to command premiums of $8-$14/cwt. (basis 500 lbs.), relative to similar class and similar weight cattle selling the same day in the same location. As well, live Internet sale participation is booming.

Perhaps the strongest testimony to industry belief in the company is the fact that industry players such as Rancher's Renaissance, Oklahoma Cattlemen's Association, Kansas Beef Marketing Group and the Five-States Beef Initiative continue to sign on for or renew eMerge service.

Moreover, through its acquisition of Professional Cattle Consultants a couple of years back, eMerge is the largest third-party verifier of cattle health and performance in the nation.

“We feel like we really are in the right place at the right time,” says Mathews. “I think this is an industry that needs and wants technology. We just have to make the connection with the producer better than we did two years ago.”

Oh, two more things eMerge learned along the way that industry might take to heart. Warren explains, “It's not practical to live and die by quarterly reports (one public company barometer) in this industry. We have decided we will be driven by our customers, not by Wall Street's expectations.”

Indeed, every producer has a customer who must be satisfied.

Finally, Mathews says, “You have to be willing to change. If we hadn't, we wouldn't be here today. The industry is going to have to embrace change.”