Rebel without a company: Part I
In Too Deep: Mac Brown had the world by the tail two years ago, when Michael Cowpland sold him a promising but rising computer business. In the end, Brown lost a company he had spent 12 years building. And half-a-dozen of Ottawa's biggest tech stars took hits along with him
James Bagnall
The Ottawa Citizen
Monday, September 10, 2001
In the end, with his company hanging by a thread, Rebel.com chairman and majority owner Mac Brown didn't recognize his peril. He was in his lawyer's office in downtown Ottawa on July 6, wrapping up a three-hour conference call with Fuji Xerox executives based in Tokyo and Palo Alto, California. It was the latest of a series of talks over the terms of a proposed partnership that carried huge possibilities for Rebel. Fuji Xerox is $7.9 billion-a-year conglomerate that markets digital colour copiers and other office technologies. The Japanese firm wanted to market Rebel's flagship computer server, the NetWinder, to its own customers in Asia.
The key provision of the proposed deal was that Fuji Xerox was prepared to invest heavily in Rebel's NetWinder unit -- the line of small business computers Brown acquired from Corel in exchange for roughly $5 million worth of Rebel shares early in 1999.
Negotiations had been running off and on for nearly eight months. The Fuji Xerox team had examined Rebel's operations and technology to the point of exhaustion. Brown and his colleagues were convinced Fuji Xerox was ready to sign. But the July 6 call should have set off alarms. The Japanese were questioning Brown about the pricing details of the proposed licensing agreement. They also wanted Rebel, not Fuji Xerox, to pay the Japanese withholding tax applicable to future sales of NetWinder products in Asia. Brown figured that arrangement could mean a substantial reduction in Rebel's profit margins.
"That's not what we agreed to," Brown complained. More discussions ensued between Brown and Jim Baker, the point man on this deal for the Japanese. Baker was president of California-based FX Palo Alto Laboratory, a wholly owned research arm of Fuji Xerox, and he had been an early champion of the NetWinder technology. Now Baker was urging Brown to reconsider his position. The call ended with a promise by Baker that he would try to persuade his Fuji Xerox bosses to give a little on the question of the withholding tax. Brown didn't appear concerned. He believed it was just another negotiating point along the way.
But he was dead wrong. Sometime that weekend -- probably Saturday morning Tokyo time -- Fuji Xerox deputy chairman Hideaki Takahashi decided to kill the deal. Baker called Brown at home on Sunday, warning him the talks "may be in trouble." That was an understatement. The following day, Baker telephoned again, saying the deal was dead and the decision was final. Baker listed a dozen or so points of contention, including the withholding tax and Fuji Xerox's view that Brown was asking too much for Netwinder's inventory. "It was a plethora of things," says Baker. "The red flags were there."
Without the Fuji Xerox alliance, Rebel collapsed like a house of cards. Rebel's biggest creditors -- the Bank of Montreal and HSBC -- called in their loans immediately. Rebel's senior managers and remaining directors of Rebel resigned Tuesday. By Thursday, the company was in receivership, under the control of KPMG executive Bob Wener.
Brown was stunned. "We had conceded most of their points," he says. He was now facing personal ruin. Unless KPMG can sell Rebel's assets for at least $12 million -- and Wener is unlikely to get close to one-quarter that amount -- Brown will be unable to pay Rebel's secured creditors and he may be forced to sell his home.
making merry in manotick
Brown's turn of fortune has been extraordinary. Early last year, Rebel completed a round of financing that valued his company at $50 million plus. More than half that paper fortune belonged to him personally. A few months later, Brown was telling would-be investors that Rebel was worth at least $200 million.
It's a common enough tale of woe in this year's tech meltdown. But Rebel's demise also sheds much light on Ottawa's tech community generally. For years, Brown had operated on the edges, running a small but profitable computer services firm.
It was staffed with relatives, close associates and girl friends -- people who enjoyed a good time and ending the evening in Brown's hot tub or the dock at Horizon Point in Manotick, the $2 million pleasure palace Brown calls home. They would drink champagne until dawn, fly anywhere on a whim and celebrate their good fortune as loudly as local bylaws or restaurant owners permitted.
As long as Brown's company was a private, stand-alone firm, it was no one's business how he conducted his private affairs, but with the acquisition of NetWinder, Rebel became one of a handful of Ottawa companies with a chance to score big. To make it happen, Rebel needed money and solid managers who knew what to do with the new property. And that meant Brown for the first time had to consider the opinions of outsiders.
Unfortunately, Brown was not equipped -- by experience or temperament -- to strike when the opportunity was greatest and waited too long to seek advice. When he got it, he became suspicious of those who provided it.
It took Brown and Rebel president Mike Mansfield nearly a year to nail down Rebel's first significant financing -- a $12 million round, at $2.50 per share, led by HSBC Securities in January, 2000. By then the first euphoric wave of Linux technology -- which had driven up the market value of Rebel's competitors to undreamed of heights -- had passed them by.
HSBC Securities told Brown that his company urgently needed professional management and an independent board of directors. Brown went along, but not before his family decided this was the time to take advantage of the strong interest shown in Rebel by individual investors in Ottawa. Brown had earlier transferred about 20 per cent of his Rebel holdings to family members, including two brothers, a sister and his parents. Within weeks of the completion of the HSBC round, Brown family members privately sold at least half million Rebel shares at $10 each. Not a penny of that share sale went into Rebel's coffers.
From the outside, though, Rebel still appeared to be a smart investment. Corel had spent $20 million U.S. to develop NetWinder. All Rebel had to do was market it and keep the technology up to date.
"We were all convinced this was the next big thing," says Colin Beaumont, a Rebel director, "The technology was so close (to being completed) and the idea of a low-cost server for the small business market was compelling."
Indeed, considering he was a relative unknown in Ottawa's tech circles, Brown attracted a surprisingly large number of Ottawa's leading lights to his cause.
Rod Bryden, the chairman of WorldHeart Corp. and owner of the Ottawa Senators, agreed in March, 2000 to serve as a director on Rebel's board, joining Beaumont, the former head of R&D at Nortel Networks. John Kelly, a partner at Reid Eddison and the founder of JetForm and other high-tech firms, in August heeded Bryden's call to serve as chief executive. Kelly, in turn, tapped Solly Patrontasch as president. Patrontasch had been one of Accenture's top consultants for years. Corel founder Michael Cowpland was also a director for a time.
Brown stepped aside, taking on the role of chairman and keeping a careful eye on developments through his network of company loyalists. From early 2000 on, he was rarely seen at company headquarters but he made his presence felt through e-mail, company conference calls and the occasional meeting with directors.
Bryden and the other newcomers meanwhile invested their time, money and reputation for what looked to be a reasonable shot at riches. But they quickly discovered Rebel's strengths had been exaggerated and that they had underestimated how much work it would take to set things right, such as building a global sales network for NetWinder and arranging to finance its continuing development. What little margin of error they had at the beginning was made even smaller by a year of confusion about who was actually running the show. None of these hired guns was able to win Brown's confidence. The result in Rebel's final year was a company at war with itself, with no one firmly in charge of its destiny.
In the end, Bryden and those he persuaded to join, emerged from Rebel poorer or personally bruised, often both. Bryden lost nearly half-a-million dollars; Kelly could lose even more. But they at least have other assets and jobs to fall back on. The same is not true of dozens of Rebel employees who were urged by Brown and company president Mike Mansfield to buy company shares. Many did, to their now profound regret.
Brown still has allies. Last Friday, backed by U.S.-based lenders, he submitted a second bid to buy Rebel's NetWinder assets. "You haven't heard the last of me yet," he told The Citizen. Maybe not, but he will likely find that earning investors' trust is not so easy the second time around.
no easy ride in ottawa
It amounts to travelling a full circle. Brown, a native of Woodstock, N.B., was very much alone when he arrived in Ottawa in 1982. Brown, now 43, had just graduated from Moncton Community College with a certificate in electronics engineering. He says he chose Ottawa because its "streets were paved with gold." He was misinformed. Brown was so broke he spent his first nights in town sleeping in a tent on Lebreton flats. He then had trouble landing a job, partly because he had no permanent address to give prospective employers.
Eventually, Brown secured a job involving the maintenance and repair of photocopiers. He left a copy of his résumé on every machine he serviced, displaying an early talent for self-promotion. One résumé wound up in the hands of a recruiter from ORCAtech, a seller of Unix computers and one of Ottawa's early technology stars. Brown was hired as a salesman.
He immersed himself in the world of computers, particularly the expensive, heavy-duty ones built by California-based Sun Microsystems. In the mid-1980s, Brown worked as a service technician for Sun's Ottawa operation. In his spare time, he accumulated used computers and components in his basement in south end Ottawa and sold them to small businesses in Canada and the U.S.
In 1987, Brown formed RMEB Services (short for his full name, Randolph Malcolm Eugene Brown) and won a few computer service contracts. He would ensure his customers' computer networks ran smoothly by agreeing to fix machines or replace key parts.
Brown's big break came in the early 1990s, when he got a late-night call from Dan Greenwood, then in charge of Newbridge's information technology network. One of Newbridge's Sun-built servers had crashed and Greenwood heard Brown might be able to fix it. Brown had the right part on hand and he solved the problem by 4:30 a.m. He and Greenwood celebrated by tapping into Newbridge's beer keg. "Over the next hour we became very good friends," Brown laughs.
Brown soon won a bid to service Newbridge's network of Sun servers -- a contract that eventually ballooned to $5 million-a-year, employing more than 30 full-time technicians. As KPMG began disposing of Rebel's assets this summer, this contract attracted the most attention from would-be buyers.
Shortly after landing the Newbridge contract, Brown also won the right to distribute Sun clones on behalf of Axil, a subsidiary of the Korean conglomerate Hyundai. Within the space of a year, Brown's company -- which he had renamed Hardware Canada Computing in 1991 -- had moved from being a $1-million-a-year operation into a thriving $10-million-a-year services and distribution business. Brown soon began building routers (specialized computers) for Newbridge, adding manufacturing to the list of his company's skills.
By the late 1990s, Brown was on top of the world. Revenues at Hardware Canada Computing were approaching $40 million annually and the company was solidly profitable, boasting net margins of 8 to 12 per cent of sales, according to Brown.
Already though, there were warning signs. Most serious entrepreneurs plow their company's earnings back into the business to help finance new projects, research and growth. Brown was already diverting a significant portion of his profits into supporting an extravagant lifestyle. Generous with his money when it came to family and friends, he had moved many of his New Brunswick relatives -- including his parents and two brothers -- into well-appointed homes in the Ottawa area. Brown built himself a 12,000 square foot home and marina on the river near Manotick.
He was single and played hard. Brown was a regular patron of some of Ottawa's more notable strip clubs including Barefax, Gypsy Rose and the Silver Dollar Exotic Club. Dancers from these and other clubs would regularly show up at Brown's house parties. A fellow high-tech entrepreneur recalls his surprise when he showed up for the first time at one of Brown's afternoon parties. "There were maybe half-a-dozen young women there who suddenly stripped down and began frolicking in Mac's indoor pool," he recalls, "I'm no prude, but Jesus! We're not 18 years old anymore."
The strippers could be found many nights at his firm's entertainment suite at the Corel Centre. Later, when Rebel was presenting itself as a more respectable firm, they became an embarrassment. On one occasion in 1999, a group of Rebel managers was using the company's Corel suite to entertain Nortel managers and their spouses. When Brown showed up with several dates, some of the Nortel wives collected their husbands and left early. Events such as this prompted a debate about whether Brown should be encouraged to stay away on nights when Rebel managers were trying to entertain business clients. Mac's response, according to one senior executive: "Screw you. This is my company."
Brown liked his pleasure but was also an ambitious businessman. As early as 1996, when he hired Mike Mansfield as president, he was thinking about ways to expand his operation. Mansfield ran a family-owned printing business, Mansfield and Rodney Printing, but was looking for a new challenge. Brown, who he met through a mutual acquaintance, gave him one. Mansfield's task was to help Brown turn Rebel (HCC at the time) into a professionally-run organization by installing human resources executives and proper accounting systems. In other words, he was to begin preparing Rebel for the day it might go public or be subject to scrutiny by outside investors.
Mansfield had difficulty convincing Brown to stop behaving as though Rebel was his personal fiefdom -- not surprisingly, given Brown's complete ownership of the firm at the time. But the two found a personal connection at some level that was quite strong. Brown and Mansfield would usually travel together to see customers and prospective business partners. In part, Mansfield saw his own role as that of protecting Brown's business interests.
Another key executive was Bryan Smith, a retired Nortel manager who was hired as chief technology officer. His son, Michael, was a top HCC salesman. The elder Smith concluded that if the company really wanted to crack into the big leagues, it needed to create its own computers -- rather than simply build and service machines designed by others.
Coincidentally, software maker Corel was close to completing the development of NetWinder, a versatile and powerful little server that would be ideal for meeting the computing needs of small businesses. (A server is a specialized computer that doles out programs and performs other essential networking tasks.) While Corel was a software company, Cowpland has always had a soft spot for computer hardware. In the early 1980s he helped finance the Hyperion, a desktop computer designed to challenge IBM's PC.
The NetWinder was meant to serve as the brains of the typical small business office, connecting computers, copiers and fax machines and linking the whole setup securely to the Internet -- all for less than $2,000 per server. Trouble was, Corel itself was in financial difficulty and couldn't afford the millions to promote the product.
Early in 1999, Corel's chief executive Michael Cowpland began calling those who might be interested in the NetWinder division. The hunt took him to the doorstep of Colin Beaumont, at the time chief executive of Plaintree Systems, the Stittsville-based manufacturer of data switches. Beaumont wasn't interested but he was familiar with the thinking at Hardware Canada Computing. He and Bryan Smith were former colleagues at Nortel Networks. Beaumont suggested Mac Brown might be a potential buyer for NetWinder.
"Mike roared off and that was the last I saw of him for a while," says Beaumont who later that year agreed to join Rebel's board of directors.
Brown clicked with cowpland
Cowpland, accompanied by three Corel executives, called Brown from his car phone and told him he'd be right by Rebel's offices, then along Colonnade Road. It was their first meeting and they hit it off. "The chemistry was perfect," says Mansfield, "We shook on it almost right away and it took us only 44 days from start to finish to close the deal."
Brown gave Corel a 25 per cent stake in his firm -- about 5 million shares -- in exchange for the NetWinder business. A few weeks later, Brown renamed his firm Rebel.com and threw a party at the Hard Rock Cafe in the Byward Market. The company originally budgeted $10,000 but Brown insisted on a free bar all night -- Rebel got stuck with a $50,000 tab.
The company had already distinguished itself by spending more on its Corel Centre entertainment suite than most of the other, much larger corporations with a presence at the arena: Aside from the $120,000 annual rental, Rebel was shelling out more than $1,000 per night for food and drinks.
Brown, Mansfield and other Rebel executives were invited to private dinners at Cowpland's mansion in Rockcliffe. In fact, the Rebel.com name emerged from a Cowpland party. The guests seized on the notion of Brown and Cowpland as true rebels -- individuals who conducted their lives outside the normal rules of society. Someone threw out the name Rebel.com and Marlen -- Michael's wife -- said "That's perfect." That sealed it.
Michael Cowpland took a seat on Rebel's board of directors and, initially at least, paid a great deal of attention to Rebel's plans for marketing the NetWinder.
For all the initial euphoria, Rebel was actually a strange beast. The vast majority of its revenues were generated by the original, HCC unit, which employed about 75. Another 25 or so workers belonged to Mask Systems, a contract computer manufacturer acquired at roughly the same time as NetWinder. The latter group was about 30 strong. There were huge cultural differences separating the three groups. HCC, which sold big, expensive computer systems and managed computer operations, was stuffed with people loyal to Brown. Many were sales people and frequent guests at Brown's home.
The NetWinder crew was top-heavy with hard-working engineers. When Brown held a party at Horizon Point to celebrate NetWinder, most attended out of politeness, then left before the 'hot tub' portion of the evening got underway. "We had a job to do," explains one NetWinder engineer who left early, "There wasn't that much for us to celebrate yet."
Many of the newcomers were also uncomfortable with Brown's personal style, which combined fearless aggression with a frankly sexist outlook. Brown would push the envelope on both counts when it came to marketing. Shortly after Rebel acquired NetWinder, Brown put out a company press release that claimed his company had spent $5 million to acquire the Rebel.com website.
The release was misleading. The terms were as follows: Rebel would pay $10,000 upfront and additional payments would not follow until Rebel hit at least $1 billion in sales. It's not clear whether this meant cumulative or annual revenues but either way the likelihood of Brown having to pay more than $10,000 was remote.
The reason he was willing to promote himself as profligate is revealing. Brown wanted to attract enough notice to get an invitation to appear on CNN. He never succeeded. "It was worth a shot," he said in a recent interview.
Around the same time, Brown tried his hand at personally organizing a print advertising campaign for Rebel's computer services group. The ad featured a topless model with her arms crossed over her breasts. "Are you looking for a little support?", the ad read, "Finally, you can relax. RebelNetworks is your complete worry-free networking and internet solution." Rebel's marketing department explained to Brown that many women run small businesses and would be offended by the ad. Mac on this occasion deferred to his colleagues' views. The ads were never published.
The coolness between the two main sides of the company quickly escalated. The main reason: it was becoming apparent to HCC workers, many of whom had invested in Rebel, that the NetWinder group was racking up big losses. Nor was it clear when NetWinder sales would start showing some life.
This was a matter of some concern as Mansfield and Brown tried to line up significant investment capital to finance NetWinder's marketing effort. "We talked to all the major investment banks," Mansfield says, "and things would always go well until they asked us 'how much money does the NetWinder generate?'"
Rebel at that point had sales of nearly $40 million (fiscal 1999 ended May 31) but less than $1 million came courtesy of NetWinder sales. The investment bankers not only had trouble seeing the true potential of the NetWinder unit, they wondered why it was being included under the same Rebel umbrella as the services unit. The latter was a low-risk, relatively slow-growing business with its own sales force. For Netwinder to succeed, on the other hand, Rebel had to get its servers into customers' hands as quickly as possible. That meant setting up a global network of third-party sales agents.
Mansfield and Brown believed there were advantages to keeping everything under the Rebel name plate, not least of which was being able to present a common family of computer products.
However, investment banks, didn't share his enthusiasm. In December, 1999 independent investors approached Rebel in a deal brokered by CIBC World Markets with the support of Michael Cowpland. The transaction, which was never completed, envisaged the split of Rebel into two companies and the addition of new management.
But late in December, Mansfield delivered a $12 million financing led by HSBC Securities Canada. Mansfield met HSBC representative Dan Hachey at a fall trade show. Hachey kept calling. "(Hachey) came in Friday with a term sheet (the document outlining terms and conditions)", says Mansfield, "and it was the first one I'd seen."
Hachey offered a deal that valued Rebel at more than $50 million and allowed Brown to retain majority control of the company. The deal closed in January. HSBC sold 4.8 million shares at $2.50 each for a total of $12 million. Rebel received three-quarters of the proceeds while $3 million went to Brown personally. Rebel employees and managers -- in part at the urging of Brown and Mansfield -- bought $3.2 million worth of the shares while institutions and other private investors snapped up the rest.
In late December, 1999 when the deal with HSBC seemed assured, Brown surprised many of his bachelor friends by marrying Mari-Josée Naim, a 24-year-old fashion model. More than 400 guests were invited to St. Andrew's Presbyterian Church. After the ceremony, the couple settled into a horse-drawn carriage which conveyed them to the Chateau Laurier Hotel. In the new year, they set off on a honeymoon, beginning with a stop in Rio de Janeiro.
Meanwhile, the proceeds from the HSBC financing were disappearing with almost stunning speed. Rebel used most of itto pay down a $6-million line of credit owing to the Bank of Montreal. The company then spent millions to build inventories of NetWinder servers and spare parts. "We assumed we would sell more than we did," says Mansfield. "The spending on other things like advertising also took off."
More crucially, the company had failed to take advantage of Linux-fever. Investors in late 1999 were frantic for shares in companies that could build machines based on Linux technology -- considered a credible alternative to Microsoft's Windows operating system. NetWinder was a Linux-based machine that competed against computers built by California-based Cobalt Networks.
Cobalt had a stunning debut on the Nasdaq exchange. It went public at $22 U.S. in November, 1999 and saw its share price soar to nearly $169 U.S. within days. That gave it a market value of more than $5 billion U.S. Cobalt was bought by Sun Microsystems in late 2000 for roughly $2 billion.
Rebel's employees could only look on in envy. None of the firm's most senior executives had experience dealing with the public stock markets and therefore lacked contacts with aggressive investment bankers such as New York-based Goldman Sachs, the firm that took Cobalt public. "Bay Street is new to me," Mansfield had acknowledged in 1999.
The opportunity to play the Linux card proved short. By spring the Linux craze was already a memory -- and little wonder. Few people were actually buying Linux gear. In the fiscal year ended May 31, 2000, Rebel sold a paltry $2.4 million worth of NetWinders. (The next year, NetWinder revenues fell to $1.7 million.)
The weak NetWinder sales, combined with Rebel's inexperience in dealing with capital markets, prompted Brown to seek outside help. Mansfield had already indicated he needed a break and was ready to step aside. Rod Bryden inadvertently stepped into the gap.
Bryden, one of Ottawa's highest-profile technology players, was soliciting donations to the Ottawa Heart Institute. He met Brown at a Senators hockey game and the Rebel founder chipped in 50,000 of his company's shares -- then worth at least $125,000. He then suggested Bryden could do something for him.
In March, Bryden agreed to serve on Rebel's board of directors. He also offered Brown the assistance of SC Stormont, his management consulting firm which would eventually help Rebel re-organize and line up fresh financing. Bryden, 60, was intrigued by the NetWinder opportunity and, besides, he was being paid amply in Rebel share options and management fees.
At the time, Bryden's willingness to sign on seemed a shrewd bet. From the outside, Rebel was a high-profile firm with some exciting prospects. Add a little professional advice, the thinking went, and Rebel could soar.
Stormont president Bob McInnes and David Keys arrived in April to examine the health of Rebel in more detail. Keys, a lawyer, had handled legal work for Bryden at WorldHeart Corp.
They found a few problems at Rebel but, they felt, nothing that couldn't be fixed with a little effort. But there was one odd thing -- McInnis and Keys were surprised to discover they were left pretty much in charge of the firm.
Just as they had arrived, Brown and Mansfield -- still chairman and president respectively -- left on a lengthy trip to China to hunt for NetWinder customers. Their guide on the tour was Ottawa businessman José Perez, a close friend of Michael Cowpland's. Perez had contacts in the Chinese government who he introduced to Brown. Later, upon their return to North America, Perez introduced the Rebel executives to potential sources of finance. At one meeting in New York, involving Whitney & Co., Brown suggested that Rebel should be worth at least $200 million. Unfortunately, that was more than double the valuation Whitney executives had been prepared to consider. Mansfield says there was only one meeting with Whitney.
As Bryden's allies assumed key positions within Rebel, Brown and Mansfield faded into the background although they would run what amounted to a parallel organization within the firm. Brown would make rare forays into the office but he was in constant contact by phone and e-mail with long-time associates. Mansfield dropped out of sight for a time, but then returned to the office almost daily to manage relations with potential customers he personally found promising. Throughout 2000 and 2001, Brown and Mansfield would arrange private meetings with potential investors without notifying Bryden's managers. Mansfield explains he and Brown would have brought important financing or customer deals to the attention of the board, had these occurred.
Shortly after Brown and Mansfield returned from Asia, Keys resigned. It's not clear why -- he had been on the job only six weeks. Those who worked with him say he was simply uncomfortable with the loose and easy management styles of Brown and Mansfield. If true, Keys was not the first to resign for this reason and he wouldn't be the last.
Bryden decided to take matters in hand. In May, 2000, he persuaded Mark Goudie, the chief financial officer for the Ottawa Senators, to take up similar duties at Rebel. And he prevailed upon his good friend John Kelly to become chief executive. Kelly, along with Bryden and five others, had co-founded SHL Systemhouse in the early 1970s and had recently become a partner at Ottawa-based Reid Eddison, a high-tech consulting group. Kelly, 61, is active on the boards of many companies and charities, and recognized he had precious little time for the top job at Rebel. But he felt he owed Bryden. "He felt I could help, so I agreed to pitch in," says Kelly.
Rebel without a company: Part II
In Too Deep: Mac Brown had the world by the tail two years ago, when Michael Cowpland sold him a promising but rising computer business. In the end, Brown lost a company he had spent 12 years building. And half-a-dozen of Ottawa's biggest tech stars took hits along with him
James Bagnall
The Ottawa Citizen
Monday, September 10, 2001
Close associates advised him not to take the assignment but in August, Kelly announced that he would. However, Kelly made it clear he could afford to spend no more than 20 hours a week as ceo. What was needed, he said, was a full-time president and he had someone in mind -- Solly Patrontasch, a senior partner at Accenture, one of the globe's largest consulting groups. Kelly and Patrontasch had chaired the United Way campaign in Ottawa in successive years. They knew and respected each other.
Kelly introduced Patrontasch to Rebel's 180 employees in early October. The two mounted a slide show offering a very bullish future for the company. Kelly predicted annual sales would move up sharply over the next five years, with nearly half the total accounted for by sales of NetWinder products. Kelly also acknowledged the contribution of Mansfield, who would now become an advisor to the new president. That arrangement had a lot of employees scratching their heads. It was soon very clear Mansfield and Patrontasch did not get along. Mansfield says Patrontasch made a point of not inviting him to management meetings.
Kelly knew that his sales projections depended mightily on two things -- getting sales channels in place and raising more money. "The strategy for distributing NetWinder products was virtually non-existent," he says. Accordingly, one of Kelly's first moves was to hire three management consultants from Toronto-based Futurus Management. The hired guns, all with extensive experience at consumer goods giant Proctor & Gamble, were to come up with a program for creating sales channels for Rebel.
Patrontasch, for his part, immersed himself in the day-to-day operations and began to impose some order on what had been a freewheeling environment.
But Kelly and Patrontasch weren't prepared for the perilous state of Rebel's finances. The first week Kelly spent on the job, he was stunned to discover that Rebel had already chewed up the $9 million proceeds of its January, 2000 private placement. Worse, HSBC's banking arm informed him it was would lend Rebel $5 million but only if Kelly and Bryden kicked in some significant money of their own. Kelly coughed up $750,000 in a secured loan while Bryden bought $450,000 worth of Rebel stock. HSBC contributed $2.5 million, with the second $2.5 million due later in the fall.
Kelly was so concerned about Rebel's finances he declined to take a salary, thereby winding up as one of the company's more significant unsecured creditors.
Rebel's financial woes were worse than they needed to be. Before Kelly signed on as chief executive, Brown's family members -- including his father and three siblings -- sold an estimated half million of their Rebel shares to Ottawa investors at $10 each between February and April, 2000, according to Mac. On one hand, the move indicated there was phenomenal investor interest in Rebel shares. After all, the $10 price gave the company an implied value of more than $200 million.
But this was an illusion. Because it was a private sale, no prospectus was required detailing the company's affairs. The buyers of those shares were taking a lot on faith. There were two other problems with the sale: First, it set a price Brown was reluctant to sell below; second, it may have denied Rebel the opportunity to promote a share offering of its own -- whatever demand existed in Ottawa for Rebel's shares, may have already been met.
In any case, HSBC wasn't convinced Rebel was ready for a share offering. It was too soon after the January round and the stock markets began sliding about the same time the Brown family members got their cheques.
Whatever the reason for Rebel's financial weakness, Kelly received another shock in November when he learned that HSBC did not intend to make its second $2.5-million payment. He was so furious he threatened to sue HSBC. "I felt HSBC had enticed me and Bryden to invest money in the company on the basis of them committing $5 million," says Kelly. Later, Kelly would change his mind about suing. "The company's best interest was not to pursue that as a basis for getting adequate financing," says Bryden.
David Hunter, a senior executive with HSBC Capital declined an interview. "I'm not comfortable giving you specifics of our particular arrangement," he says. However, Mansfield says HSBC Capital did have the option to withhold the second payment, depending on Rebel's balance sheet performance. "They had reserved the right to say no in the event of material adverse change," Mansfield says. Kelly agrees but adds, "HSBC confirmed the second payment after they had the (balance sheet) information in their hands."
Things were now starting to get desperate. Kelly and Patrontasch had concluded that Rebel's two main businesses -- the services unit and the NetWinder group -- should be separated and sold. Kelly argued this should be done in two stages. He told the board Rebel should first sell its services group and use the estimated $10 million to $15 million in net proceeds to eliminate Rebel's growing debt and other obligations. The second stage would be to sell a portion of the NetWinder unit and use those proceeds to finance the continued R&D and sales development of its products.
A lot needed to go right. Prospective buyers and investors weren't in a rush to examine the two parts of Rebel's business. It didn't help that Brown and Mansfield were pursuing their own agenda. Neither was impressed by the conservative corporate culture that Kelly was trying to impose. They grew convinced that Bryden's hired guns were working on financing options designed to squeeze out Brown, a sensitive issue since the Rebel founder owned a bare majority of the firm's shares. Any attempt to raise new money would make him a minority shareholder. Brown appeared concerned that a new deal might be contingent upon him leaving the firm.
At one point Brown accused Bryden of trying to seize control of Rebel. The allegation, which was aired at a Rebel board meeting in late 2000 or early 2001, appears to have been triggered by an approach Bryden had made to senior management at Corel. Bryden says he intended to see if Corel was interested in buying more shares as part of a potential venture capital round. "It is pretty usual that entrepreneurs like Mac -- even when they ask for help -- will quickly misinterpret real action to try to help," says Bryden. "They see it instead as action to take advantage of a weakness."
Bryden offered to leave the board, saying he had other things to do with his life, but Brown backed down, saying he "may have misinterpreted" Bryden's money raising efforts.
Maybe so, but Brown began his own hunt for investors in California, Boston, New York, Toronto and Ottawa. He says he and Mansfield made pitches to dozens of venture capital firms and other potential investors. There was no real method to the search. "Mac just took out his rolodex and began calling," says a top Rebel executive.
Locally, he called on BitFlash chief executive Antoine Paquin and offered him a seat on Rebel's board. Paquin declined. Conrad Lewis and Ken Wigglesworth, principals with Eagle One Ventures, were approached for financing. "It was not a situation that fitted what we do," says Lewis. In the first meeting with March Networks' chief executive Terence Matthews, Brown talked up the value of his NetWinder unit, then offered Matthews a Rebel board seat. Matthews told him bluntly he couldn't accept because there was someone on Rebel's board he didn't like. Brown offered to get rid of the board member on the spot -- even though he didn't know who the offending person was. Matthews noted shrewdly "Well then he'd know I don't like him, wouldn't he?"
Matthews spoke again with Brown near yearend 2000, largely at the urging of Pat Beirne, a former Corel executive who had been instrumental in developing the NetWinder but who was (and still is) helping Matthews evaluate new technologies. Talks continued into the new year.
in search of the big bucks
Kelly meanwhile was meeting with literally dozens of Canada-based financiers to shore up Rebel's balance sheet. But he was faced with a conundrum. Rebel's need for cash was immediate but the only way to pry money quickly from venture capitalists was to ask for a small amount, say $5 million. The instant the venture firm's partners examined Rebel's financial position, however, they realized Rebel required substantially more capital. And that meant they needed a lot more time to evaluate any investment of that magnitude.
Late in 2000 Mansfield began pursuing an overseas buyer for the NetWinder business. Rebel's sales team had made a cold call earlier that year to California-based FX Palo Alto Laboratories, a unit of Fuji Xerox of Tokyo.
FXPAL had been evaluating the NetWinder technology since mid-summer, 2000 and now was showing signs of interest. Mansfield boarded a plane to Tokyo in December and met with the top Japanese officials including Hideaki Takahashi, the deputy chairman of Fuji Xerox. When Mansfield returned to Ottawa, he told Kelly and Patrontasch that Fuji Xerox wanted a deal. He was greeted with skepticism and found it understandable. "Mac had been everywhere saying 'here's a deal', 'here's a deal'," says Mansfield, "and he had become like the boy who cried 'wolf'." Mansfield decided to pursue a possible investment from Fuji Xerox on his own.
Early in the new year, things were beginning to look promising. Patrontasch tapped his Accenture network and found receptive former colleagues at Xwave, the computer systems integration arm of Halifax-based Aliant Inc. Rebel and Xwave executive met face to face for the first time on Jan. 19. Xwave signed a letter of intent within days to acquire Rebel's computer services unit for $13 million plus.
The Xwave engineers and managers began examining the property in more detail. For the first time, Patrontasch was starting to feel like he was in control of things. In early March, he caught wind that Brown and Mansfield were set to fly to Japan for more detailed talks with Fuji Xerox. He and other managers pressed Kelly into going along.
It was an uneasy threesome. Kelly felt like the uninvited guest while Brown was continuing to play other business angles.
Even as he boarded the plane to Tokyo, Brown made one last call to Matthews and asked if he wanted to buy NetWinder. Brown said now was the time to do it because he was on his way to see Fuji Xerox. Matthews declined, citing disagreements among his advisors.
The meetings with Fuji Xerox started off well but, while they were still in Tokyo, the Rebel executives learned Xwave had pulled out. Xwave's parent company, Aliant, had put a temporary hold on all acquisition activity until it could be sure it had properly absorbed its recent purchases. Rebel wasn't being singled out, in other words, but that hardly mattered. The company's two-stage plan for recovery was in jeopardy. Now everything appeared to rest with a deal with Fuji Xerox.
Brown and Kelly told Fuji Xerox of the Xwave decision. The Japanese recognized immediately that their bargaining clout had improved. But there was now a third party at the talks -- Rebel's creditors. Rebel had been spending millions more on the NetWinder unit than it had been getting back in the form of sales. The result was Rebel's debt was becoming a supreme burden. In March, secured creditors alone were owed probably close to $10 million. While Fuji Xerox's proposed investment was significant it wouldn't be enough to cover the debt. The Japanese firm didn't want to put in money and have it go to Rebel's other creditors. So, absent Rebel's ability to find another buyer for its services unit on short notice, any deal involving Fuji Xerox would have to involve the creditors.
Kelly says at one point Rebel contemplated doing the Fuji Xerox negotiations from the protection of a voluntary receivership, where the competing claims would be worked out.
But Kelly and Fuji Xerox came up with a plan for avoiding this drastic action, at least temporarily. Here's how it was meant to work: Rebel would spin off a separate, debt-free Netwinder unit, called Newco. Fuji Xerox would then invest $7.8 million ($5 million U.S.) for a one-third share of Newco, giving the unit an implied value of $23.4 million. Rebel's existing shareholders would be given two-thirds of Newco. The new, debt-free company would then do additional share offerings when new capital was required.
The negotiators on all sides believed that the presence of Fuji Xerox would make it relatively easy to attract fresh investors. Even so, Fuji Xerox proposed a series of staggered payments, timed to coincide with Rebel's ability to meet its obligations. According to Rebel officials familiar with the deal, Rebel would get $1 million U.S. in exchange for the right to license Netwinder technology and manufacture the associated hardware. Newco would get $2 million U.S. upon its successful restructuring; and Fuji Xerox would kick in the final $2 million U.S. to Newco later.
At heart, the deal recognized that Rebel was already insolvent but it at least offered some hope its creditors would see a return on their investment, esepcially if Newco proved successful. Negotiations over the details continued through the spring.
Patrontasch, meanwhile, was trying desperately to extract some cash out of Rebel's services unit. When the Xwave proposal collapsed, the former Accenture partner tried to orchestrate a management buyout. The managers of the services unit, along with outside investors identified by Patrontasch, would buy the business from Rebel and run it themselves.
But as Patrontasch began a more detailed examination of the unit, he became increasingly concerned about its underlying strength. Key people were already leaving and the value of companies in the services sector generally was dropping. The buyout wouldn't work. In mid-April, he informed Rebel's board he would resign. His last day there was Apr. 23, when he told one employee he planned to spend the summer at home.
Within days of Patrontasch's departure, Bryden, too, was gone. "I left because the company was controlled by [Mac]," says Bryden, "For the board to be effective, Mac has to be willing to work through the board. If I couldn't be effective, I would rather not be there with the responsibility." Colin Beaumont resigned months earlier for similar reasons. Goudie also quit in April and returned to his former job at the Ottawa Senators.
Kelly, though, stayed the course, albeit with some distractions. In June, he and his brother Hubert bought EDS Innovations from EDS Canada and renamed it NexInnovations. Since NexInnovations competed against Rebel's services unit, Kelly would absent himself from discussions involving that part of the business.
In May, Brown hired Dave Gordon to take on the chore of president. Gordon was a former Newbridge executive who had been responsible for placing orders for Rebel gear. To preserve cash flow, Gordon sacked one-fifth of Rebel's staff. Brown was still working his Rolodex, tapping firms like Eagle One for advice and possible capital, but Fuji Xerox was looking like Rebel's only hope. Negotiations were extremely tedious, not least because the Japanese were going over Rebel's operations with a degree of scrutiny Rebel's engineers found unsettling. When Fuji Xerox revealed July 9 that it would not invest in Rebel, there was disbelief that it was really all over.
Rebel's employees and executives alike had been living so long on the edge, so often in earshot of Brown's soothing words that a deal was nearly here, that it took some time to decompress. Dave Gordon took off to the Canadian North. Bryan Smith retreated to his retirement home near Perth. "I don't want to talk about anything to do with Rebel until summer's over," he says.
Mansfield is still distraught. "I live with the shame of this lost opportunity," he says, "A lot of employees put borrowed money into this company and I encouraged them to think about the opportunity. I will carry this burden for a long, long time."
And Brown? He is putting a good face on things. For weeks after the July 6 bombshell he was busy trying to mount new bids to reclaim his company and save his home. It's still not clear Brown will be able to keep it but, despite everything, he is showing surprisingly little angst. "Every decision I made was the right one at the time," he said in late August. It's a stunning contrast with the assessment of the man who examined his operations from top to bottom this year.
"We didn't push Rebel into insolvency," stresses FXPAL president Jim Baker, "They were headed there full steam ahead; our arrival on the scene only postponed it."
Rebel was headed there for a host of reasons but it all began with a whim. Brown got a call out of the blue from a local legend, Michael Cowpland, and decided to take a chance on something Cowpland had built. What Brown failed to recognize was how completely NetWinder would change his company and his world.
The high tech stars Brown attracted to his cause failed equally to do their due diligence. They accepted the assessment of long time friends that Rebel was a worthy project in part because that was the way it was done. The tech frenzy of the time made the risks seem that much smaller. The efforts of Bryden, Kelly and the others almost certainly kept Rebel alive months longer than it might otherwise have done on its own. But that's small comfort for months of enervating effort and the damage done to their personal wealth, self-esteem and reputation.
You know the original demo for the N64, the one they incorporated in to Mario64, where you could play with Mario's face and distort it and tweak it? I think Microsoft should do the same demo for the XBox with Bill G's face and maybe Steve Ballmer's as well.
All you need is a Mac with iMovie, a few clips from MS executive keynotes, and you can produce stuff like this.
Trying to make Bill and Steve look goofier would be like trying to make the Pope more religious.
The picture is most definitely a 3D rendering. For one thing, the edges of the shadows are too crisp.
Whether or not it's an actual MS product, I don't know. However, this makes perfect sense. Steve Jobs talks about Apple positioning the Mac as the "digital hub" for a wide array of personal devices. I don't see the computer as a personal digital hub yet, really (most people I know don't have that many devices!). But there is an opportunity in the market to position a computer or game console as an "entertainment hub", connecting to your TV and stereo systems. People have been talking about the mythical "set top box" for at least a decade, but we are only just now at a place where it's a possibility, because of a) DVD, b) digital video recording, and c) affordable broadband internet.
Let's run through the potential capabilities of this box: It plays DVD's. It plays A-list console games. It controls your TV and stereo systems. It provides program guides and digitally records from TV and Radio. It plays audio CD's. It rips, stores and plays MP3's. It streams internet radio stations. It streams full-screen full-motion video on demand (ok, that one may be in the future still).
I was a little disappointed that they didn't position the X-Box as an entertainment hub, but I guess they needed to establish the X-Box as a bona-fide gaming machine first (to gain a market foothold), and then gradually move in with the HomeStation.
My only disappointment is that Microsoft is going to be the one to hit the market with this type of device first. Apple was heading in this direction 5 years ago with the Pippin; a TV console device that played games (it would have played DVD's, too, but the technology was too new and the cost was prohibitive). However, Apple once again hit on an interesting idea that they didn't know how to market, and now Pippin is as painful a word to Apple as Bob is to Microsoft.
> With Farscape running start to finish, my copy
> of Lexx Season 1 on DVD en route, and the new
> Star Trek a few weeks away, I think I need to
> take a week off...
And what exactly is it that you do???
He's Vice-President of New Technologies. It's important that he keep up with tomorrow's tech headlines.
Come on, this guy's an idiot if he thinks this makes any sense. He's mad at Bush for withholding funding, so he's going to withhold funding in protest? Get real. If he felt so strongly about people dying needlessly, he'd be donating MORE not less.
What he's REALLY doing is using this as an excuse to hold on to $60 million dollars that he doesn't want to part with. Let's face it, he got rich on tech and probably most of his portfolio went into the toilet with the economic downturn, something he wasn't counting on when he made that huge-ass pledge. Now he's scrambling to retain his wealth so that he doesn't end up working the drive-through at Burger King.
Oh and, hey, Bush is limiting federal funding of stem cell research! How conveninent! Just use the President as the scapegoat (a politician he publicly opposed, BTW), and everything's hunky-dorey, right?
Well, it really doesn't matter if Apple sells lots of arguably Unix desktops because Unix is completely irrelevant on the desktop, even to the average Apple customer.
Actually, I think it does matter. I don't think it's any secret that Steve Jobs has grudgingly embraced the consumer market; he developed the Mac for business people, and he developed the NeXT for business people. He knows the corporate market is much more lucrative, and I would speculate that Apple will gradually enter the mid-range and then the high-end server markets.
The fact that OS X will be installed on a few million desktops will give Apple a tremendous amount of feedback on debugging and refining their OS. It will also require much less capital to implement because they will essentially use one OS, not two (like they had with AUX, or MS with Win9x and NT).
Apple already has a reputation for great hardware (aside from the current CPU MHZ debacle); now they just need to build a reputation for having a great operating system.
Re:Hate to say, sounds like a dot-bomb strategy...
on
HP Buys Compaq
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· Score: 1
Does HP even do desktops any more (and if so, why)?
Actually, I see HP far more often in retail channels than I do Compaq. Sam's Club, Best Buy, Comp USA, Wal-Mart, etc.; HP has a very strong presence on the consumer desktop.
This is a bad move for HP, there's way too much overlap. This is only good for HP's competitors, because it removes one major vendor from the market and probably cash-straps another.
According to the press release on Palm's site, Be is to be paid $11 million in toilet tissue, also known as Palm stock.
Ack! I can just see Gasse on his knees pleading with Palm, "Please buy us! I'll even take it all in [gulp] stock!"
Also notice that the press release says that Palm is buying intellectual property only! Smart move. From the release, Be Inc will retain "rights and assets [which] include Be's cash (they have cash?) and cash equivalents, receivables, certain contractual rights, and rights to assert and bring certain claims and causes of action, including under antitrust laws." IOW, Be is probably going to file bankruptcy once the sale of the IP is complete.
It's important to note that web sites should not try to rely entirely on online promotion. An article in AdWeek a while back pointed out that the most effective dot-com advertising campaigns were those that used a mix of traditional print and broadcast, as well as online. Too many websites think that they can do it all with banner ads, search engines and word-of-mouth, but with a few hundred million web pages out there, it's tough to stand out.
I'm a former BlueStar customer...former, as in "last week". I signed up with BlueStar back when they were making money, long before Covad bought them out. Of course, Covad scoops them up and subsequently shuts them down, with barely a month's notice (which left my company without DSL for several days).
I never had a problem with BlueStar in the pre-Covad days, but a few months ago they were having network outages across the east coast. Ack! We were already shopping around for a new ISP when we got The Letter that says that BlueStar is being shut down. No mention of Covad DSL, transferring service, or any of that. TWO WEEKS LATER a Covad rep calls to try to transfer me over to Covad DSL. I say, "Thanks, but we've already made other arrangements. Besides, if I signed with you now, I'd have two weeks of internet downtime" (BellSouth takes a month to install a DSL line, and no, they won't use the old one).
My question is, why did Covad shut down BlueStar the way that it did, and force out thousands of customers that they didn't need to? I'm sure that part of it was that there was overlap with existing Covad DSL services, but there were some areas of the country where BlueStar was the ONLY DSL provider; those businesses that relied on BlueStar are now back to dial-up for internet access.
But, again...why didn't Covad try to transition BlueStar customers into the Covad network, and gradually shut down the redundant areas? Business 101: it's a whole heck of a lot cheaper to keep an existing customer than to find a new one.
I just signed up with another DSL provider who has happily informed me that they have scooped up so many former BlueStar customers that their router supplier is having trouble cranking out the hardware fast enough.
Frankly, I'm not surprised that Covad is going under, there seems to be a lot of deficiencies at the top. They buy a business that's making money and shut them down. They force out thousands of customers that their own sales people are scrambling to get back. My only advice to those considering Covad is to run away as fast as possible.
Re:Oh, let's give 'em a hug....
on
Breaking Windows
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· Score: 1
Some of the Allchin insights where he's chastising the MS geeks "money doesn't grow on trees yadayadayada" is the very heart of the difference between corporate and open software. The open software allows much more freedom of exploration. Something that's cool and good will first pick up a small cult following, then get bigger based solely on its merits.
The problem, though, is that commercial software (like Windows) will always have the option of using open source software to further itself. However, open source software (like Linux) can't compel developers to port commercial apps (like MS Office).
If MS ever gets to a place where they feel that Linux is encroaching on them, what will they do? Simple, hire a team of programmers to start porting Linux apps over to W2K. Or, do a clean room conversion to a proprietary Windows app, but instead of reverse engineering, they'll have the full, documented source code available. Embrace and extend, with Windows-only features.
The way I see it, by the time Linux has the tools, the apps, and the widespread adoption of MS in 2001, it will be 2011 and MS will have moved on to the next big money maker. When it comes to mass-market adoption, the open source movement is horribly slow.
One factor to consider is that someone may have trouble shipping their console in adequate quantities for Christmas... probably not the PS2, but possibly the X-Box, or even the Game Cube.
Even though the Dreamcast flopped, they essentially did the right thing by flooding the market with consoles last Christmas, precisely because they knew the PS2 was in short supply. More than a few parents looking for a PS2 decided to get their kids "the next best thing," I'm sure.
Also, I believe the competition has gotten so intense in the console biz that any company that doesn't sell through at least a million units in the holiday season is probably toast, anyway. Nintendo is quite confident in their in-house game franchises, and they still seem to have a very strong relationship with LucasArts. Also take into account that, if you have pre-teens in your home, Nintendo is really the only console maker that is targeting that market.
Microsoft never threatened to withhold the OS or to raise prices on it. There was a set price per license and a date on which you could get your hands on copies. What it did do, though was offer incentives - not unlike what AOL is doing here. If a manufacturer was willing to do things their way, MS offered them discounted licenses (similar to AOLs $35 rebate) as well as a chance to get their hands on the Gold CDs early.
MS Windows is ALWAYS available, to any manufacturer. The price, however, is the $199 MSRP. If MS withheld their licensing agreement from a manufacturer, then the price of installing Windows would basically price the manufacturer right out of the market in most cases.
AOL IS NOT DISCOUNTING LICENSES. They are paying for new users, that's vastly different. The AOL software does not need to be licensed, they give it away all day, every day.
If a manufacturer doesn't do business with AOL, then nothing has changed for him. If a manufacturer refused to "play ball" with the "old" MS, then MS had the ability to directly increase his costs and force him out of the market.
The main difference is that AOL doesn't have the power to force computer manufacturers to to this by threatening to withhold the OS; rather, they are enticing them by offering $35 for each new user they nab. Microsoft, Earthlink, or any other ISP is free to make similar deals and offer more money for users. Or the manufacturer is free to reject all offers out-of-hand and do as he pleases.
Well, I think you're still looking at a significant weight reduction by lopping alot of the internal glass. Also, 21" monitors aren't just heavy, they're also bulky, making it difficult to manage the weight. A thin version, even if it weighed the same, would still be easier to carry.
Slashdot Mirror
They will probably put a memorial park in its place.
President Bush just spoke for two minutes. He confirmed that it was, indeed, a terrorist attack.
Rebel without a company: Part I
In Too Deep: Mac Brown had the world by the tail two years ago, when Michael Cowpland sold him a promising but rising computer business. In the end, Brown lost a company he had spent 12 years building. And half-a-dozen of Ottawa's biggest tech stars took hits along with him
James Bagnall
The Ottawa Citizen
Monday, September 10, 2001
In the end, with his company hanging by a thread, Rebel.com chairman and majority owner Mac Brown didn't recognize his peril. He was in his lawyer's office in downtown Ottawa on July 6, wrapping up a three-hour conference call with Fuji Xerox executives based in Tokyo and Palo Alto, California. It was the latest of a series of talks over the terms of a proposed partnership that carried huge possibilities for Rebel. Fuji Xerox is $7.9 billion-a-year conglomerate that markets digital colour copiers and other office technologies. The Japanese firm wanted to market Rebel's flagship computer server, the NetWinder, to its own customers in Asia.
The key provision of the proposed deal was that Fuji Xerox was prepared to invest heavily in Rebel's NetWinder unit -- the line of small business computers Brown acquired from Corel in exchange for roughly $5 million worth of Rebel shares early in 1999.
Negotiations had been running off and on for nearly eight months. The Fuji Xerox team had examined Rebel's operations and technology to the point of exhaustion. Brown and his colleagues were convinced Fuji Xerox was ready to sign. But the July 6 call should have set off alarms. The Japanese were questioning Brown about the pricing details of the proposed licensing agreement. They also wanted Rebel, not Fuji Xerox, to pay the Japanese withholding tax applicable to future sales of NetWinder products in Asia. Brown figured that arrangement could mean a substantial reduction in Rebel's profit margins.
"That's not what we agreed to," Brown complained. More discussions ensued between Brown and Jim Baker, the point man on this deal for the Japanese. Baker was president of California-based FX Palo Alto Laboratory, a wholly owned research arm of Fuji Xerox, and he had been an early champion of the NetWinder technology. Now Baker was urging Brown to reconsider his position. The call ended with a promise by Baker that he would try to persuade his Fuji Xerox bosses to give a little on the question of the withholding tax. Brown didn't appear concerned. He believed it was just another negotiating point along the way.
But he was dead wrong. Sometime that weekend -- probably Saturday morning Tokyo time -- Fuji Xerox deputy chairman Hideaki Takahashi decided to kill the deal. Baker called Brown at home on Sunday, warning him the talks "may be in trouble." That was an understatement. The following day, Baker telephoned again, saying the deal was dead and the decision was final. Baker listed a dozen or so points of contention, including the withholding tax and Fuji Xerox's view that Brown was asking too much for Netwinder's inventory. "It was a plethora of things," says Baker. "The red flags were there."
Without the Fuji Xerox alliance, Rebel collapsed like a house of cards. Rebel's biggest creditors -- the Bank of Montreal and HSBC -- called in their loans immediately. Rebel's senior managers and remaining directors of Rebel resigned Tuesday. By Thursday, the company was in receivership, under the control of KPMG executive Bob Wener.
Brown was stunned. "We had conceded most of their points," he says. He was now facing personal ruin. Unless KPMG can sell Rebel's assets for at least $12 million -- and Wener is unlikely to get close to one-quarter that amount -- Brown will be unable to pay Rebel's secured creditors and he may be forced to sell his home.
making merry in manotick
Brown's turn of fortune has been extraordinary. Early last year, Rebel completed a round of financing that valued his company at $50 million plus. More than half that paper fortune belonged to him personally. A few months later, Brown was telling would-be investors that Rebel was worth at least $200 million.
It's a common enough tale of woe in this year's tech meltdown. But Rebel's demise also sheds much light on Ottawa's tech community generally. For years, Brown had operated on the edges, running a small but profitable computer services firm.
It was staffed with relatives, close associates and girl friends -- people who enjoyed a good time and ending the evening in Brown's hot tub or the dock at Horizon Point in Manotick, the $2 million pleasure palace Brown calls home. They would drink champagne until dawn, fly anywhere on a whim and celebrate their good fortune as loudly as local bylaws or restaurant owners permitted.
As long as Brown's company was a private, stand-alone firm, it was no one's business how he conducted his private affairs, but with the acquisition of NetWinder, Rebel became one of a handful of Ottawa companies with a chance to score big. To make it happen, Rebel needed money and solid managers who knew what to do with the new property. And that meant Brown for the first time had to consider the opinions of outsiders.
Unfortunately, Brown was not equipped -- by experience or temperament -- to strike when the opportunity was greatest and waited too long to seek advice. When he got it, he became suspicious of those who provided it.
It took Brown and Rebel president Mike Mansfield nearly a year to nail down Rebel's first significant financing -- a $12 million round, at $2.50 per share, led by HSBC Securities in January, 2000. By then the first euphoric wave of Linux technology -- which had driven up the market value of Rebel's competitors to undreamed of heights -- had passed them by.
HSBC Securities told Brown that his company urgently needed professional management and an independent board of directors. Brown went along, but not before his family decided this was the time to take advantage of the strong interest shown in Rebel by individual investors in Ottawa. Brown had earlier transferred about 20 per cent of his Rebel holdings to family members, including two brothers, a sister and his parents. Within weeks of the completion of the HSBC round, Brown family members privately sold at least half million Rebel shares at $10 each. Not a penny of that share sale went into Rebel's coffers.
From the outside, though, Rebel still appeared to be a smart investment. Corel had spent $20 million U.S. to develop NetWinder. All Rebel had to do was market it and keep the technology up to date.
"We were all convinced this was the next big thing," says Colin Beaumont, a Rebel director, "The technology was so close (to being completed) and the idea of a low-cost server for the small business market was compelling."
Indeed, considering he was a relative unknown in Ottawa's tech circles, Brown attracted a surprisingly large number of Ottawa's leading lights to his cause.
Rod Bryden, the chairman of WorldHeart Corp. and owner of the Ottawa Senators, agreed in March, 2000 to serve as a director on Rebel's board, joining Beaumont, the former head of R&D at Nortel Networks. John Kelly, a partner at Reid Eddison and the founder of JetForm and other high-tech firms, in August heeded Bryden's call to serve as chief executive. Kelly, in turn, tapped Solly Patrontasch as president. Patrontasch had been one of Accenture's top consultants for years. Corel founder Michael Cowpland was also a director for a time.
Brown stepped aside, taking on the role of chairman and keeping a careful eye on developments through his network of company loyalists. From early 2000 on, he was rarely seen at company headquarters but he made his presence felt through e-mail, company conference calls and the occasional meeting with directors.
Bryden and the other newcomers meanwhile invested their time, money and reputation for what looked to be a reasonable shot at riches. But they quickly discovered Rebel's strengths had been exaggerated and that they had underestimated how much work it would take to set things right, such as building a global sales network for NetWinder and arranging to finance its continuing development. What little margin of error they had at the beginning was made even smaller by a year of confusion about who was actually running the show. None of these hired guns was able to win Brown's confidence. The result in Rebel's final year was a company at war with itself, with no one firmly in charge of its destiny.
In the end, Bryden and those he persuaded to join, emerged from Rebel poorer or personally bruised, often both. Bryden lost nearly half-a-million dollars; Kelly could lose even more. But they at least have other assets and jobs to fall back on. The same is not true of dozens of Rebel employees who were urged by Brown and company president Mike Mansfield to buy company shares. Many did, to their now profound regret.
Brown still has allies. Last Friday, backed by U.S.-based lenders, he submitted a second bid to buy Rebel's NetWinder assets. "You haven't heard the last of me yet," he told The Citizen. Maybe not, but he will likely find that earning investors' trust is not so easy the second time around.
no easy ride in ottawa
It amounts to travelling a full circle. Brown, a native of Woodstock, N.B., was very much alone when he arrived in Ottawa in 1982. Brown, now 43, had just graduated from Moncton Community College with a certificate in electronics engineering. He says he chose Ottawa because its "streets were paved with gold." He was misinformed. Brown was so broke he spent his first nights in town sleeping in a tent on Lebreton flats. He then had trouble landing a job, partly because he had no permanent address to give prospective employers.
Eventually, Brown secured a job involving the maintenance and repair of photocopiers. He left a copy of his résumé on every machine he serviced, displaying an early talent for self-promotion. One résumé wound up in the hands of a recruiter from ORCAtech, a seller of Unix computers and one of Ottawa's early technology stars. Brown was hired as a salesman.
He immersed himself in the world of computers, particularly the expensive, heavy-duty ones built by California-based Sun Microsystems. In the mid-1980s, Brown worked as a service technician for Sun's Ottawa operation. In his spare time, he accumulated used computers and components in his basement in south end Ottawa and sold them to small businesses in Canada and the U.S.
In 1987, Brown formed RMEB Services (short for his full name, Randolph Malcolm Eugene Brown) and won a few computer service contracts. He would ensure his customers' computer networks ran smoothly by agreeing to fix machines or replace key parts.
Brown's big break came in the early 1990s, when he got a late-night call from Dan Greenwood, then in charge of Newbridge's information technology network. One of Newbridge's Sun-built servers had crashed and Greenwood heard Brown might be able to fix it. Brown had the right part on hand and he solved the problem by 4:30 a.m. He and Greenwood celebrated by tapping into Newbridge's beer keg. "Over the next hour we became very good friends," Brown laughs.
Brown soon won a bid to service Newbridge's network of Sun servers -- a contract that eventually ballooned to $5 million-a-year, employing more than 30 full-time technicians. As KPMG began disposing of Rebel's assets this summer, this contract attracted the most attention from would-be buyers.
Shortly after landing the Newbridge contract, Brown also won the right to distribute Sun clones on behalf of Axil, a subsidiary of the Korean conglomerate Hyundai. Within the space of a year, Brown's company -- which he had renamed Hardware Canada Computing in 1991 -- had moved from being a $1-million-a-year operation into a thriving $10-million-a-year services and distribution business. Brown soon began building routers (specialized computers) for Newbridge, adding manufacturing to the list of his company's skills.
By the late 1990s, Brown was on top of the world. Revenues at Hardware Canada Computing were approaching $40 million annually and the company was solidly profitable, boasting net margins of 8 to 12 per cent of sales, according to Brown.
Already though, there were warning signs. Most serious entrepreneurs plow their company's earnings back into the business to help finance new projects, research and growth. Brown was already diverting a significant portion of his profits into supporting an extravagant lifestyle. Generous with his money when it came to family and friends, he had moved many of his New Brunswick relatives -- including his parents and two brothers -- into well-appointed homes in the Ottawa area. Brown built himself a 12,000 square foot home and marina on the river near Manotick.
He was single and played hard. Brown was a regular patron of some of Ottawa's more notable strip clubs including Barefax, Gypsy Rose and the Silver Dollar Exotic Club. Dancers from these and other clubs would regularly show up at Brown's house parties. A fellow high-tech entrepreneur recalls his surprise when he showed up for the first time at one of Brown's afternoon parties. "There were maybe half-a-dozen young women there who suddenly stripped down and began frolicking in Mac's indoor pool," he recalls, "I'm no prude, but Jesus! We're not 18 years old anymore."
The strippers could be found many nights at his firm's entertainment suite at the Corel Centre. Later, when Rebel was presenting itself as a more respectable firm, they became an embarrassment. On one occasion in 1999, a group of Rebel managers was using the company's Corel suite to entertain Nortel managers and their spouses. When Brown showed up with several dates, some of the Nortel wives collected their husbands and left early. Events such as this prompted a debate about whether Brown should be encouraged to stay away on nights when Rebel managers were trying to entertain business clients. Mac's response, according to one senior executive: "Screw you. This is my company."
Brown liked his pleasure but was also an ambitious businessman. As early as 1996, when he hired Mike Mansfield as president, he was thinking about ways to expand his operation. Mansfield ran a family-owned printing business, Mansfield and Rodney Printing, but was looking for a new challenge. Brown, who he met through a mutual acquaintance, gave him one. Mansfield's task was to help Brown turn Rebel (HCC at the time) into a professionally-run organization by installing human resources executives and proper accounting systems. In other words, he was to begin preparing Rebel for the day it might go public or be subject to scrutiny by outside investors.
Mansfield had difficulty convincing Brown to stop behaving as though Rebel was his personal fiefdom -- not surprisingly, given Brown's complete ownership of the firm at the time. But the two found a personal connection at some level that was quite strong. Brown and Mansfield would usually travel together to see customers and prospective business partners. In part, Mansfield saw his own role as that of protecting Brown's business interests.
Another key executive was Bryan Smith, a retired Nortel manager who was hired as chief technology officer. His son, Michael, was a top HCC salesman. The elder Smith concluded that if the company really wanted to crack into the big leagues, it needed to create its own computers -- rather than simply build and service machines designed by others.
Coincidentally, software maker Corel was close to completing the development of NetWinder, a versatile and powerful little server that would be ideal for meeting the computing needs of small businesses. (A server is a specialized computer that doles out programs and performs other essential networking tasks.) While Corel was a software company, Cowpland has always had a soft spot for computer hardware. In the early 1980s he helped finance the Hyperion, a desktop computer designed to challenge IBM's PC.
The NetWinder was meant to serve as the brains of the typical small business office, connecting computers, copiers and fax machines and linking the whole setup securely to the Internet -- all for less than $2,000 per server. Trouble was, Corel itself was in financial difficulty and couldn't afford the millions to promote the product.
Early in 1999, Corel's chief executive Michael Cowpland began calling those who might be interested in the NetWinder division. The hunt took him to the doorstep of Colin Beaumont, at the time chief executive of Plaintree Systems, the Stittsville-based manufacturer of data switches. Beaumont wasn't interested but he was familiar with the thinking at Hardware Canada Computing. He and Bryan Smith were former colleagues at Nortel Networks. Beaumont suggested Mac Brown might be a potential buyer for NetWinder.
"Mike roared off and that was the last I saw of him for a while," says Beaumont who later that year agreed to join Rebel's board of directors.
Brown clicked with cowpland
Cowpland, accompanied by three Corel executives, called Brown from his car phone and told him he'd be right by Rebel's offices, then along Colonnade Road. It was their first meeting and they hit it off. "The chemistry was perfect," says Mansfield, "We shook on it almost right away and it took us only 44 days from start to finish to close the deal."
Brown gave Corel a 25 per cent stake in his firm -- about 5 million shares -- in exchange for the NetWinder business. A few weeks later, Brown renamed his firm Rebel.com and threw a party at the Hard Rock Cafe in the Byward Market. The company originally budgeted $10,000 but Brown insisted on a free bar all night -- Rebel got stuck with a $50,000 tab.
The company had already distinguished itself by spending more on its Corel Centre entertainment suite than most of the other, much larger corporations with a presence at the arena: Aside from the $120,000 annual rental, Rebel was shelling out more than $1,000 per night for food and drinks.
Brown, Mansfield and other Rebel executives were invited to private dinners at Cowpland's mansion in Rockcliffe. In fact, the Rebel.com name emerged from a Cowpland party. The guests seized on the notion of Brown and Cowpland as true rebels -- individuals who conducted their lives outside the normal rules of society. Someone threw out the name Rebel.com and Marlen -- Michael's wife -- said "That's perfect." That sealed it.
Michael Cowpland took a seat on Rebel's board of directors and, initially at least, paid a great deal of attention to Rebel's plans for marketing the NetWinder.
For all the initial euphoria, Rebel was actually a strange beast. The vast majority of its revenues were generated by the original, HCC unit, which employed about 75. Another 25 or so workers belonged to Mask Systems, a contract computer manufacturer acquired at roughly the same time as NetWinder. The latter group was about 30 strong. There were huge cultural differences separating the three groups. HCC, which sold big, expensive computer systems and managed computer operations, was stuffed with people loyal to Brown. Many were sales people and frequent guests at Brown's home.
The NetWinder crew was top-heavy with hard-working engineers. When Brown held a party at Horizon Point to celebrate NetWinder, most attended out of politeness, then left before the 'hot tub' portion of the evening got underway. "We had a job to do," explains one NetWinder engineer who left early, "There wasn't that much for us to celebrate yet."
Many of the newcomers were also uncomfortable with Brown's personal style, which combined fearless aggression with a frankly sexist outlook. Brown would push the envelope on both counts when it came to marketing. Shortly after Rebel acquired NetWinder, Brown put out a company press release that claimed his company had spent $5 million to acquire the Rebel.com website.
The release was misleading. The terms were as follows: Rebel would pay $10,000 upfront and additional payments would not follow until Rebel hit at least $1 billion in sales. It's not clear whether this meant cumulative or annual revenues but either way the likelihood of Brown having to pay more than $10,000 was remote.
The reason he was willing to promote himself as profligate is revealing. Brown wanted to attract enough notice to get an invitation to appear on CNN. He never succeeded. "It was worth a shot," he said in a recent interview.
Around the same time, Brown tried his hand at personally organizing a print advertising campaign for Rebel's computer services group. The ad featured a topless model with her arms crossed over her breasts. "Are you looking for a little support?", the ad read, "Finally, you can relax. RebelNetworks is your complete worry-free networking and internet solution." Rebel's marketing department explained to Brown that many women run small businesses and would be offended by the ad. Mac on this occasion deferred to his colleagues' views. The ads were never published.
The coolness between the two main sides of the company quickly escalated. The main reason: it was becoming apparent to HCC workers, many of whom had invested in Rebel, that the NetWinder group was racking up big losses. Nor was it clear when NetWinder sales would start showing some life.
This was a matter of some concern as Mansfield and Brown tried to line up significant investment capital to finance NetWinder's marketing effort. "We talked to all the major investment banks," Mansfield says, "and things would always go well until they asked us 'how much money does the NetWinder generate?'"
Rebel at that point had sales of nearly $40 million (fiscal 1999 ended May 31) but less than $1 million came courtesy of NetWinder sales. The investment bankers not only had trouble seeing the true potential of the NetWinder unit, they wondered why it was being included under the same Rebel umbrella as the services unit. The latter was a low-risk, relatively slow-growing business with its own sales force. For Netwinder to succeed, on the other hand, Rebel had to get its servers into customers' hands as quickly as possible. That meant setting up a global network of third-party sales agents.
Mansfield and Brown believed there were advantages to keeping everything under the Rebel name plate, not least of which was being able to present a common family of computer products.
However, investment banks, didn't share his enthusiasm. In December, 1999 independent investors approached Rebel in a deal brokered by CIBC World Markets with the support of Michael Cowpland. The transaction, which was never completed, envisaged the split of Rebel into two companies and the addition of new management.
But late in December, Mansfield delivered a $12 million financing led by HSBC Securities Canada. Mansfield met HSBC representative Dan Hachey at a fall trade show. Hachey kept calling. "(Hachey) came in Friday with a term sheet (the document outlining terms and conditions)", says Mansfield, "and it was the first one I'd seen."
Hachey offered a deal that valued Rebel at more than $50 million and allowed Brown to retain majority control of the company. The deal closed in January. HSBC sold 4.8 million shares at $2.50 each for a total of $12 million. Rebel received three-quarters of the proceeds while $3 million went to Brown personally. Rebel employees and managers -- in part at the urging of Brown and Mansfield -- bought $3.2 million worth of the shares while institutions and other private investors snapped up the rest.
In late December, 1999 when the deal with HSBC seemed assured, Brown surprised many of his bachelor friends by marrying Mari-Josée Naim, a 24-year-old fashion model. More than 400 guests were invited to St. Andrew's Presbyterian Church. After the ceremony, the couple settled into a horse-drawn carriage which conveyed them to the Chateau Laurier Hotel. In the new year, they set off on a honeymoon, beginning with a stop in Rio de Janeiro.
Meanwhile, the proceeds from the HSBC financing were disappearing with almost stunning speed. Rebel used most of itto pay down a $6-million line of credit owing to the Bank of Montreal. The company then spent millions to build inventories of NetWinder servers and spare parts. "We assumed we would sell more than we did," says Mansfield. "The spending on other things like advertising also took off."
More crucially, the company had failed to take advantage of Linux-fever. Investors in late 1999 were frantic for shares in companies that could build machines based on Linux technology -- considered a credible alternative to Microsoft's Windows operating system. NetWinder was a Linux-based machine that competed against computers built by California-based Cobalt Networks.
Cobalt had a stunning debut on the Nasdaq exchange. It went public at $22 U.S. in November, 1999 and saw its share price soar to nearly $169 U.S. within days. That gave it a market value of more than $5 billion U.S. Cobalt was bought by Sun Microsystems in late 2000 for roughly $2 billion.
Rebel's employees could only look on in envy. None of the firm's most senior executives had experience dealing with the public stock markets and therefore lacked contacts with aggressive investment bankers such as New York-based Goldman Sachs, the firm that took Cobalt public. "Bay Street is new to me," Mansfield had acknowledged in 1999.
The opportunity to play the Linux card proved short. By spring the Linux craze was already a memory -- and little wonder. Few people were actually buying Linux gear. In the fiscal year ended May 31, 2000, Rebel sold a paltry $2.4 million worth of NetWinders. (The next year, NetWinder revenues fell to $1.7 million.)
The weak NetWinder sales, combined with Rebel's inexperience in dealing with capital markets, prompted Brown to seek outside help. Mansfield had already indicated he needed a break and was ready to step aside. Rod Bryden inadvertently stepped into the gap.
Bryden, one of Ottawa's highest-profile technology players, was soliciting donations to the Ottawa Heart Institute. He met Brown at a Senators hockey game and the Rebel founder chipped in 50,000 of his company's shares -- then worth at least $125,000. He then suggested Bryden could do something for him.
In March, Bryden agreed to serve on Rebel's board of directors. He also offered Brown the assistance of SC Stormont, his management consulting firm which would eventually help Rebel re-organize and line up fresh financing. Bryden, 60, was intrigued by the NetWinder opportunity and, besides, he was being paid amply in Rebel share options and management fees.
At the time, Bryden's willingness to sign on seemed a shrewd bet. From the outside, Rebel was a high-profile firm with some exciting prospects. Add a little professional advice, the thinking went, and Rebel could soar.
Stormont president Bob McInnes and David Keys arrived in April to examine the health of Rebel in more detail. Keys, a lawyer, had handled legal work for Bryden at WorldHeart Corp.
They found a few problems at Rebel but, they felt, nothing that couldn't be fixed with a little effort. But there was one odd thing -- McInnis and Keys were surprised to discover they were left pretty much in charge of the firm.
Just as they had arrived, Brown and Mansfield -- still chairman and president respectively -- left on a lengthy trip to China to hunt for NetWinder customers. Their guide on the tour was Ottawa businessman José Perez, a close friend of Michael Cowpland's. Perez had contacts in the Chinese government who he introduced to Brown. Later, upon their return to North America, Perez introduced the Rebel executives to potential sources of finance. At one meeting in New York, involving Whitney & Co., Brown suggested that Rebel should be worth at least $200 million. Unfortunately, that was more than double the valuation Whitney executives had been prepared to consider. Mansfield says there was only one meeting with Whitney.
As Bryden's allies assumed key positions within Rebel, Brown and Mansfield faded into the background although they would run what amounted to a parallel organization within the firm. Brown would make rare forays into the office but he was in constant contact by phone and e-mail with long-time associates. Mansfield dropped out of sight for a time, but then returned to the office almost daily to manage relations with potential customers he personally found promising. Throughout 2000 and 2001, Brown and Mansfield would arrange private meetings with potential investors without notifying Bryden's managers. Mansfield explains he and Brown would have brought important financing or customer deals to the attention of the board, had these occurred.
Shortly after Brown and Mansfield returned from Asia, Keys resigned. It's not clear why -- he had been on the job only six weeks. Those who worked with him say he was simply uncomfortable with the loose and easy management styles of Brown and Mansfield. If true, Keys was not the first to resign for this reason and he wouldn't be the last.
Bryden decided to take matters in hand. In May, 2000, he persuaded Mark Goudie, the chief financial officer for the Ottawa Senators, to take up similar duties at Rebel. And he prevailed upon his good friend John Kelly to become chief executive. Kelly, along with Bryden and five others, had co-founded SHL Systemhouse in the early 1970s and had recently become a partner at Ottawa-based Reid Eddison, a high-tech consulting group. Kelly, 61, is active on the boards of many companies and charities, and recognized he had precious little time for the top job at Rebel. But he felt he owed Bryden. "He felt I could help, so I agreed to pitch in," says Kelly.
©Copyright 2001The Ottawa Citizen
Still trying to get Part I, but here's Part II:
Rebel without a company: Part II
In Too Deep: Mac Brown had the world by the tail two years ago, when Michael Cowpland sold him a promising but rising computer business. In the end, Brown lost a company he had spent 12 years building. And half-a-dozen of Ottawa's biggest tech stars took hits along with him
James Bagnall
The Ottawa Citizen
Monday, September 10, 2001
Close associates advised him not to take the assignment but in August, Kelly announced that he would. However, Kelly made it clear he could afford to spend no more than 20 hours a week as ceo. What was needed, he said, was a full-time president and he had someone in mind -- Solly Patrontasch, a senior partner at Accenture, one of the globe's largest consulting groups. Kelly and Patrontasch had chaired the United Way campaign in Ottawa in successive years. They knew and respected each other.
Kelly introduced Patrontasch to Rebel's 180 employees in early October. The two mounted a slide show offering a very bullish future for the company. Kelly predicted annual sales would move up sharply over the next five years, with nearly half the total accounted for by sales of NetWinder products. Kelly also acknowledged the contribution of Mansfield, who would now become an advisor to the new president. That arrangement had a lot of employees scratching their heads. It was soon very clear Mansfield and Patrontasch did not get along. Mansfield says Patrontasch made a point of not inviting him to management meetings.
Kelly knew that his sales projections depended mightily on two things -- getting sales channels in place and raising more money. "The strategy for distributing NetWinder products was virtually non-existent," he says. Accordingly, one of Kelly's first moves was to hire three management consultants from Toronto-based Futurus Management. The hired guns, all with extensive experience at consumer goods giant Proctor & Gamble, were to come up with a program for creating sales channels for Rebel.
Patrontasch, for his part, immersed himself in the day-to-day operations and began to impose some order on what had been a freewheeling environment.
But Kelly and Patrontasch weren't prepared for the perilous state of Rebel's finances. The first week Kelly spent on the job, he was stunned to discover that Rebel had already chewed up the $9 million proceeds of its January, 2000 private placement. Worse, HSBC's banking arm informed him it was would lend Rebel $5 million but only if Kelly and Bryden kicked in some significant money of their own. Kelly coughed up $750,000 in a secured loan while Bryden bought $450,000 worth of Rebel stock. HSBC contributed $2.5 million, with the second $2.5 million due later in the fall.
Kelly was so concerned about Rebel's finances he declined to take a salary, thereby winding up as one of the company's more significant unsecured creditors.
Rebel's financial woes were worse than they needed to be. Before Kelly signed on as chief executive, Brown's family members -- including his father and three siblings -- sold an estimated half million of their Rebel shares to Ottawa investors at $10 each between February and April, 2000, according to Mac. On one hand, the move indicated there was phenomenal investor interest in Rebel shares. After all, the $10 price gave the company an implied value of more than $200 million.
But this was an illusion. Because it was a private sale, no prospectus was required detailing the company's affairs. The buyers of those shares were taking a lot on faith. There were two other problems with the sale: First, it set a price Brown was reluctant to sell below; second, it may have denied Rebel the opportunity to promote a share offering of its own -- whatever demand existed in Ottawa for Rebel's shares, may have already been met.
In any case, HSBC wasn't convinced Rebel was ready for a share offering. It was too soon after the January round and the stock markets began sliding about the same time the Brown family members got their cheques.
Whatever the reason for Rebel's financial weakness, Kelly received another shock in November when he learned that HSBC did not intend to make its second $2.5-million payment. He was so furious he threatened to sue HSBC. "I felt HSBC had enticed me and Bryden to invest money in the company on the basis of them committing $5 million," says Kelly. Later, Kelly would change his mind about suing. "The company's best interest was not to pursue that as a basis for getting adequate financing," says Bryden.
David Hunter, a senior executive with HSBC Capital declined an interview. "I'm not comfortable giving you specifics of our particular arrangement," he says. However, Mansfield says HSBC Capital did have the option to withhold the second payment, depending on Rebel's balance sheet performance. "They had reserved the right to say no in the event of material adverse change," Mansfield says. Kelly agrees but adds, "HSBC confirmed the second payment after they had the (balance sheet) information in their hands."
Things were now starting to get desperate. Kelly and Patrontasch had concluded that Rebel's two main businesses -- the services unit and the NetWinder group -- should be separated and sold. Kelly argued this should be done in two stages. He told the board Rebel should first sell its services group and use the estimated $10 million to $15 million in net proceeds to eliminate Rebel's growing debt and other obligations. The second stage would be to sell a portion of the NetWinder unit and use those proceeds to finance the continued R&D and sales development of its products.
A lot needed to go right. Prospective buyers and investors weren't in a rush to examine the two parts of Rebel's business. It didn't help that Brown and Mansfield were pursuing their own agenda. Neither was impressed by the conservative corporate culture that Kelly was trying to impose. They grew convinced that Bryden's hired guns were working on financing options designed to squeeze out Brown, a sensitive issue since the Rebel founder owned a bare majority of the firm's shares. Any attempt to raise new money would make him a minority shareholder. Brown appeared concerned that a new deal might be contingent upon him leaving the firm.
At one point Brown accused Bryden of trying to seize control of Rebel. The allegation, which was aired at a Rebel board meeting in late 2000 or early 2001, appears to have been triggered by an approach Bryden had made to senior management at Corel. Bryden says he intended to see if Corel was interested in buying more shares as part of a potential venture capital round. "It is pretty usual that entrepreneurs like Mac -- even when they ask for help -- will quickly misinterpret real action to try to help," says Bryden. "They see it instead as action to take advantage of a weakness."
Bryden offered to leave the board, saying he had other things to do with his life, but Brown backed down, saying he "may have misinterpreted" Bryden's money raising efforts.
Maybe so, but Brown began his own hunt for investors in California, Boston, New York, Toronto and Ottawa. He says he and Mansfield made pitches to dozens of venture capital firms and other potential investors. There was no real method to the search. "Mac just took out his rolodex and began calling," says a top Rebel executive.
Locally, he called on BitFlash chief executive Antoine Paquin and offered him a seat on Rebel's board. Paquin declined. Conrad Lewis and Ken Wigglesworth, principals with Eagle One Ventures, were approached for financing. "It was not a situation that fitted what we do," says Lewis. In the first meeting with March Networks' chief executive Terence Matthews, Brown talked up the value of his NetWinder unit, then offered Matthews a Rebel board seat. Matthews told him bluntly he couldn't accept because there was someone on Rebel's board he didn't like. Brown offered to get rid of the board member on the spot -- even though he didn't know who the offending person was. Matthews noted shrewdly "Well then he'd know I don't like him, wouldn't he?"
Matthews spoke again with Brown near yearend 2000, largely at the urging of Pat Beirne, a former Corel executive who had been instrumental in developing the NetWinder but who was (and still is) helping Matthews evaluate new technologies. Talks continued into the new year.
in search of the big bucks
Kelly meanwhile was meeting with literally dozens of Canada-based financiers to shore up Rebel's balance sheet. But he was faced with a conundrum. Rebel's need for cash was immediate but the only way to pry money quickly from venture capitalists was to ask for a small amount, say $5 million. The instant the venture firm's partners examined Rebel's financial position, however, they realized Rebel required substantially more capital. And that meant they needed a lot more time to evaluate any investment of that magnitude.
Late in 2000 Mansfield began pursuing an overseas buyer for the NetWinder business. Rebel's sales team had made a cold call earlier that year to California-based FX Palo Alto Laboratories, a unit of Fuji Xerox of Tokyo.
FXPAL had been evaluating the NetWinder technology since mid-summer, 2000 and now was showing signs of interest. Mansfield boarded a plane to Tokyo in December and met with the top Japanese officials including Hideaki Takahashi, the deputy chairman of Fuji Xerox. When Mansfield returned to Ottawa, he told Kelly and Patrontasch that Fuji Xerox wanted a deal. He was greeted with skepticism and found it understandable. "Mac had been everywhere saying 'here's a deal', 'here's a deal'," says Mansfield, "and he had become like the boy who cried 'wolf'." Mansfield decided to pursue a possible investment from Fuji Xerox on his own.
Early in the new year, things were beginning to look promising. Patrontasch tapped his Accenture network and found receptive former colleagues at Xwave, the computer systems integration arm of Halifax-based Aliant Inc. Rebel and Xwave executive met face to face for the first time on Jan. 19. Xwave signed a letter of intent within days to acquire Rebel's computer services unit for $13 million plus.
The Xwave engineers and managers began examining the property in more detail. For the first time, Patrontasch was starting to feel like he was in control of things. In early March, he caught wind that Brown and Mansfield were set to fly to Japan for more detailed talks with Fuji Xerox. He and other managers pressed Kelly into going along.
It was an uneasy threesome. Kelly felt like the uninvited guest while Brown was continuing to play other business angles.
Even as he boarded the plane to Tokyo, Brown made one last call to Matthews and asked if he wanted to buy NetWinder. Brown said now was the time to do it because he was on his way to see Fuji Xerox. Matthews declined, citing disagreements among his advisors.
The meetings with Fuji Xerox started off well but, while they were still in Tokyo, the Rebel executives learned Xwave had pulled out. Xwave's parent company, Aliant, had put a temporary hold on all acquisition activity until it could be sure it had properly absorbed its recent purchases. Rebel wasn't being singled out, in other words, but that hardly mattered. The company's two-stage plan for recovery was in jeopardy. Now everything appeared to rest with a deal with Fuji Xerox.
Brown and Kelly told Fuji Xerox of the Xwave decision. The Japanese recognized immediately that their bargaining clout had improved. But there was now a third party at the talks -- Rebel's creditors. Rebel had been spending millions more on the NetWinder unit than it had been getting back in the form of sales. The result was Rebel's debt was becoming a supreme burden. In March, secured creditors alone were owed probably close to $10 million. While Fuji Xerox's proposed investment was significant it wouldn't be enough to cover the debt. The Japanese firm didn't want to put in money and have it go to Rebel's other creditors. So, absent Rebel's ability to find another buyer for its services unit on short notice, any deal involving Fuji Xerox would have to involve the creditors.
Kelly says at one point Rebel contemplated doing the Fuji Xerox negotiations from the protection of a voluntary receivership, where the competing claims would be worked out.
But Kelly and Fuji Xerox came up with a plan for avoiding this drastic action, at least temporarily. Here's how it was meant to work: Rebel would spin off a separate, debt-free Netwinder unit, called Newco. Fuji Xerox would then invest $7.8 million ($5 million U.S.) for a one-third share of Newco, giving the unit an implied value of $23.4 million. Rebel's existing shareholders would be given two-thirds of Newco. The new, debt-free company would then do additional share offerings when new capital was required.
The negotiators on all sides believed that the presence of Fuji Xerox would make it relatively easy to attract fresh investors. Even so, Fuji Xerox proposed a series of staggered payments, timed to coincide with Rebel's ability to meet its obligations. According to Rebel officials familiar with the deal, Rebel would get $1 million U.S. in exchange for the right to license Netwinder technology and manufacture the associated hardware. Newco would get $2 million U.S. upon its successful restructuring; and Fuji Xerox would kick in the final $2 million U.S. to Newco later.
At heart, the deal recognized that Rebel was already insolvent but it at least offered some hope its creditors would see a return on their investment, esepcially if Newco proved successful. Negotiations over the details continued through the spring.
Patrontasch, meanwhile, was trying desperately to extract some cash out of Rebel's services unit. When the Xwave proposal collapsed, the former Accenture partner tried to orchestrate a management buyout. The managers of the services unit, along with outside investors identified by Patrontasch, would buy the business from Rebel and run it themselves.
But as Patrontasch began a more detailed examination of the unit, he became increasingly concerned about its underlying strength. Key people were already leaving and the value of companies in the services sector generally was dropping. The buyout wouldn't work. In mid-April, he informed Rebel's board he would resign. His last day there was Apr. 23, when he told one employee he planned to spend the summer at home.
Within days of Patrontasch's departure, Bryden, too, was gone. "I left because the company was controlled by [Mac]," says Bryden, "For the board to be effective, Mac has to be willing to work through the board. If I couldn't be effective, I would rather not be there with the responsibility." Colin Beaumont resigned months earlier for similar reasons. Goudie also quit in April and returned to his former job at the Ottawa Senators.
Kelly, though, stayed the course, albeit with some distractions. In June, he and his brother Hubert bought EDS Innovations from EDS Canada and renamed it NexInnovations. Since NexInnovations competed against Rebel's services unit, Kelly would absent himself from discussions involving that part of the business.
In May, Brown hired Dave Gordon to take on the chore of president. Gordon was a former Newbridge executive who had been responsible for placing orders for Rebel gear. To preserve cash flow, Gordon sacked one-fifth of Rebel's staff. Brown was still working his Rolodex, tapping firms like Eagle One for advice and possible capital, but Fuji Xerox was looking like Rebel's only hope. Negotiations were extremely tedious, not least because the Japanese were going over Rebel's operations with a degree of scrutiny Rebel's engineers found unsettling. When Fuji Xerox revealed July 9 that it would not invest in Rebel, there was disbelief that it was really all over.
Rebel's employees and executives alike had been living so long on the edge, so often in earshot of Brown's soothing words that a deal was nearly here, that it took some time to decompress. Dave Gordon took off to the Canadian North. Bryan Smith retreated to his retirement home near Perth. "I don't want to talk about anything to do with Rebel until summer's over," he says.
Mansfield is still distraught. "I live with the shame of this lost opportunity," he says, "A lot of employees put borrowed money into this company and I encouraged them to think about the opportunity. I will carry this burden for a long, long time."
And Brown? He is putting a good face on things. For weeks after the July 6 bombshell he was busy trying to mount new bids to reclaim his company and save his home. It's still not clear Brown will be able to keep it but, despite everything, he is showing surprisingly little angst. "Every decision I made was the right one at the time," he said in late August. It's a stunning contrast with the assessment of the man who examined his operations from top to bottom this year.
"We didn't push Rebel into insolvency," stresses FXPAL president Jim Baker, "They were headed there full steam ahead; our arrival on the scene only postponed it."
Rebel was headed there for a host of reasons but it all began with a whim. Brown got a call out of the blue from a local legend, Michael Cowpland, and decided to take a chance on something Cowpland had built. What Brown failed to recognize was how completely NetWinder would change his company and his world.
The high tech stars Brown attracted to his cause failed equally to do their due diligence. They accepted the assessment of long time friends that Rebel was a worthy project in part because that was the way it was done. The tech frenzy of the time made the risks seem that much smaller. The efforts of Bryden, Kelly and the others almost certainly kept Rebel alive months longer than it might otherwise have done on its own. But that's small comfort for months of enervating effort and the damage done to their personal wealth, self-esteem and reputation.
©Copyright 2001The Ottawa Citizen
Did I miss the part where the villagers funded space exploration because the alien ate the sheep?
You know the original demo for the N64, the one they incorporated in to Mario64, where you could play with Mario's face and distort it and tweak it? I think Microsoft should do the same demo for the XBox with Bill G's face and maybe Steve Ballmer's as well.
All you need is a Mac with iMovie, a few clips from MS executive keynotes, and you can produce stuff like this.
Trying to make Bill and Steve look goofier would be like trying to make the Pope more religious.
The picture is most definitely a 3D rendering. For one thing, the edges of the shadows are too crisp.
Whether or not it's an actual MS product, I don't know. However, this makes perfect sense. Steve Jobs talks about Apple positioning the Mac as the "digital hub" for a wide array of personal devices. I don't see the computer as a personal digital hub yet, really (most people I know don't have that many devices!). But there is an opportunity in the market to position a computer or game console as an "entertainment hub", connecting to your TV and stereo systems. People have been talking about the mythical "set top box" for at least a decade, but we are only just now at a place where it's a possibility, because of a) DVD, b) digital video recording, and c) affordable broadband internet.
Let's run through the potential capabilities of this box: It plays DVD's. It plays A-list console games. It controls your TV and stereo systems. It provides program guides and digitally records from TV and Radio. It plays audio CD's. It rips, stores and plays MP3's. It streams internet radio stations. It streams full-screen full-motion video on demand (ok, that one may be in the future still).
I was a little disappointed that they didn't position the X-Box as an entertainment hub, but I guess they needed to establish the X-Box as a bona-fide gaming machine first (to gain a market foothold), and then gradually move in with the HomeStation.
My only disappointment is that Microsoft is going to be the one to hit the market with this type of device first. Apple was heading in this direction 5 years ago with the Pippin; a TV console device that played games (it would have played DVD's, too, but the technology was too new and the cost was prohibitive). However, Apple once again hit on an interesting idea that they didn't know how to market, and now Pippin is as painful a word to Apple as Bob is to Microsoft.
> With Farscape running start to finish, my copy ...
> of Lexx Season 1 on DVD en route, and the new
> Star Trek a few weeks away, I think I need to
> take a week off
And what exactly is it that you do???
He's Vice-President of New Technologies. It's important that he keep up with tomorrow's tech headlines.
When was the TOS/DS9 mirror universe shown on ST:TNG?
uuuhhh...I thought ST:TNG WAS the evil mirror universe...
Come on, this guy's an idiot if he thinks this makes any sense. He's mad at Bush for withholding funding, so he's going to withhold funding in protest? Get real. If he felt so strongly about people dying needlessly, he'd be donating MORE not less.
What he's REALLY doing is using this as an excuse to hold on to $60 million dollars that he doesn't want to part with. Let's face it, he got rich on tech and probably most of his portfolio went into the toilet with the economic downturn, something he wasn't counting on when he made that huge-ass pledge. Now he's scrambling to retain his wealth so that he doesn't end up working the drive-through at Burger King.
Oh and, hey, Bush is limiting federal funding of stem cell research! How conveninent! Just use the President as the scapegoat (a politician he publicly opposed, BTW), and everything's hunky-dorey, right?
Well, it really doesn't matter if Apple sells lots of arguably Unix desktops because Unix is completely irrelevant on the desktop, even to the average Apple customer.
Actually, I think it does matter. I don't think it's any secret that Steve Jobs has grudgingly embraced the consumer market; he developed the Mac for business people, and he developed the NeXT for business people. He knows the corporate market is much more lucrative, and I would speculate that Apple will gradually enter the mid-range and then the high-end server markets.
The fact that OS X will be installed on a few million desktops will give Apple a tremendous amount of feedback on debugging and refining their OS. It will also require much less capital to implement because they will essentially use one OS, not two (like they had with AUX, or MS with Win9x and NT).
Apple already has a reputation for great hardware (aside from the current CPU MHZ debacle); now they just need to build a reputation for having a great operating system.
Actually, I see HP far more often in retail channels than I do Compaq. Sam's Club, Best Buy, Comp USA, Wal-Mart, etc.; HP has a very strong presence on the consumer desktop.
This is a bad move for HP, there's way too much overlap. This is only good for HP's competitors, because it removes one major vendor from the market and probably cash-straps another.
Ack! I can just see Gasse on his knees pleading with Palm, "Please buy us! I'll even take it all in [gulp] stock!"
Also notice that the press release says that Palm is buying intellectual property only! Smart move. From the release, Be Inc will retain "rights and assets [which] include Be's cash (they have cash?) and cash equivalents, receivables, certain contractual rights, and rights to assert and bring certain claims and causes of action, including under antitrust laws." IOW, Be is probably going to file bankruptcy once the sale of the IP is complete.
That looks like the logo for a LongHorn Steakhouse or something... ;-)
It's important to note that web sites should not try to rely entirely on online promotion. An article in AdWeek a while back pointed out that the most effective dot-com advertising campaigns were those that used a mix of traditional print and broadcast, as well as online. Too many websites think that they can do it all with banner ads, search engines and word-of-mouth, but with a few hundred million web pages out there, it's tough to stand out.
I never had a problem with BlueStar in the pre-Covad days, but a few months ago they were having network outages across the east coast. Ack! We were already shopping around for a new ISP when we got The Letter that says that BlueStar is being shut down. No mention of Covad DSL, transferring service, or any of that. TWO WEEKS LATER a Covad rep calls to try to transfer me over to Covad DSL. I say, "Thanks, but we've already made other arrangements. Besides, if I signed with you now, I'd have two weeks of internet downtime" (BellSouth takes a month to install a DSL line, and no, they won't use the old one).
My question is, why did Covad shut down BlueStar the way that it did, and force out thousands of customers that they didn't need to? I'm sure that part of it was that there was overlap with existing Covad DSL services, but there were some areas of the country where BlueStar was the ONLY DSL provider; those businesses that relied on BlueStar are now back to dial-up for internet access.
But, again...why didn't Covad try to transition BlueStar customers into the Covad network, and gradually shut down the redundant areas? Business 101: it's a whole heck of a lot cheaper to keep an existing customer than to find a new one.
I just signed up with another DSL provider who has happily informed me that they have scooped up so many former BlueStar customers that their router supplier is having trouble cranking out the hardware fast enough.
Frankly, I'm not surprised that Covad is going under, there seems to be a lot of deficiencies at the top. They buy a business that's making money and shut them down. They force out thousands of customers that their own sales people are scrambling to get back. My only advice to those considering Covad is to run away as fast as possible.
The problem, though, is that commercial software (like Windows) will always have the option of using open source software to further itself. However, open source software (like Linux) can't compel developers to port commercial apps (like MS Office).
If MS ever gets to a place where they feel that Linux is encroaching on them, what will they do? Simple, hire a team of programmers to start porting Linux apps over to W2K. Or, do a clean room conversion to a proprietary Windows app, but instead of reverse engineering, they'll have the full, documented source code available. Embrace and extend, with Windows-only features.
The way I see it, by the time Linux has the tools, the apps, and the widespread adoption of MS in 2001, it will be 2011 and MS will have moved on to the next big money maker. When it comes to mass-market adoption, the open source movement is horribly slow.
Hmmm...I wonder if they're gonna do any cross-promotional stuff?
Tie a string? Just catch it on the flip-side...
Even though the Dreamcast flopped, they essentially did the right thing by flooding the market with consoles last Christmas, precisely because they knew the PS2 was in short supply. More than a few parents looking for a PS2 decided to get their kids "the next best thing," I'm sure.
Also, I believe the competition has gotten so intense in the console biz that any company that doesn't sell through at least a million units in the holiday season is probably toast, anyway. Nintendo is quite confident in their in-house game franchises, and they still seem to have a very strong relationship with LucasArts. Also take into account that, if you have pre-teens in your home, Nintendo is really the only console maker that is targeting that market.
Ummm...how old are you, Paul? Isn't there an age requirement to get in this place? Sheesh...
It was a small rocketship carrying a strange young visitor from another planet, with powers and abilities far beyond those of mortal men!
No, you're wrong.
Microsoft never threatened to withhold the OS or to raise prices on it. There was a set price per license and a date on which you could get your hands on copies. What it did do, though was offer incentives - not unlike what AOL is doing here. If a manufacturer was willing to do things their way, MS offered them discounted licenses (similar to AOLs $35 rebate) as well as a chance to get their hands on the Gold CDs early.
MS Windows is ALWAYS available, to any manufacturer. The price, however, is the $199 MSRP. If MS withheld their licensing agreement from a manufacturer, then the price of installing Windows would basically price the manufacturer right out of the market in most cases.
AOL IS NOT DISCOUNTING LICENSES. They are paying for new users, that's vastly different. The AOL software does not need to be licensed, they give it away all day, every day.
If a manufacturer doesn't do business with AOL, then nothing has changed for him. If a manufacturer refused to "play ball" with the "old" MS, then MS had the ability to directly increase his costs and force him out of the market.
Ah, good old American capitalism at work...
Well, I think you're still looking at a significant weight reduction by lopping alot of the internal glass. Also, 21" monitors aren't just heavy, they're also bulky, making it difficult to manage the weight. A thin version, even if it weighed the same, would still be easier to carry.