Divine: Parallels with Enron

The SEC makes sure companies stick to the rules, tell investors the truth and behave in a responsible manner. In the home of free-market capitalism and a land where lawyers work night and day to find a way for clients to circumvent every rule, that’s no small task. The names Enron and Worldcom might mean something to you. Clearly the SEC is the place to go when looking for information on a company in trouble. Its web site is a vast repository of corporate information, and you would reasonably expect it to provide any investor with the unvarnished truth – one click and a concerned Little Guy should be concerned no more.

Or so you would think.

Scan the US press at the moment and you would get the impression that Divine is a company in deep, deep trouble. Divine’s lawyer told the Chicago Tribune that money paid to RoweCom by libraries was used within other Divine operations.

‘RoweCom/Faxon going bankrupt?’ asks a typical headline. ‘Parent Divine junking subscription biz; library orders going unfilled’.

But scan the company’s SEC filings and you would be left thinking Divine is simply seeking to overcome some minor bureaucratic hurdle.

A statement admits the company ‘is currently experiencing financial difficulties’.

And it continues opaquely: ‘Due to financial constraints, RoweCom has not been able to place or make payments for the substantial majority of its customer orders for 2003 subscriptions.’ There is little explanation.

Instead, Divine prefers to cling to the spectacularly unclear language favoured by management consultants: ‘New organisational alignment strengthens Divine’s ability to offer end-to-end solutions for the extended enterprise.’

And where there is light in the darkness, it is depressingly dim. Divine confirms it is reorganising into three divisions and selling off RoweCom to ‘focus on digital content delivery’.

But by last week that deal with subscription agent Swets Blackwell had unravelled. In a rather more straightforward announcement, Swets said it had withdrawn its bid because it became clear that ‘its key conditions, including the resolution of prepayments made by Divine Information Systems customers and the ability to offer these customers uninterrupted service, would not be met’.

RoweCom now hopes to get into bed with EBSCO Industries, another leading information systems business, subject of course to ‘conditions’. The companies say that ‘for customers of RoweCom’s European operations, all orders placed with RoweCom will be fulfilled’.

But how should we react to yet another financial crisis? Has nothing been learned from the mistakes of Enron and Worldcom? Well, it’s perhaps a little early to say. We should know more when Divine releases its earnings results for Q4 2002 next month.

While there is nothing to suggest that Divine will suffer the same fate as those two corporate calamities, there are parallels. Divine is a company that has grown at a phenomenal pace (buying more than 20 companies) in an industry where electronic inventory has replaced the tangible. It is even run by a colourful entrepreneur – the pony-tailed Andrew Filipowski.

It will take some time to unravel the payments situation in the US and the company may be badly wounded by this scandal. But it is at least guilty of bad accounting – and that it is a reputation no company wants.

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