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NewsBreak Update: RoweCom and divine Negotiate with Creditors and Potential Buyers
by
Posted On January 13, 2003
On December 20, we reported on the apparent financial collapse of RoweCom, the Massachusetts-based subsidiary of divine, Inc. (http://newsbreaks.infotoday.com/nbreader.asp?ArticleID=17026). Orders for subscriptions and payments made by libraries to RoweCom this fall were simply not passed along to the publishers, leaving both libraries and publishers in financial limbo and considerable chaos. At that time, divine announced that it intended to divest the subscription agency. According to divine, EBSCO had agreed to buy the European RoweCom business and Swets Blackwell had expressed interest in "acquiring some or all of the RoweCom operations worldwide."

Since then, an ad hoc committee of the creditors has been formed to "perform investigations and analyses of the operations and financial condition of RoweCom and its parent corporation, divine, initiate negotiations with RoweCom and divine, and to take such other actions that the Informal Committee may determine are in the best interests of its constituency." The informal committee met by telephone on Dec. 27 and appointed a steering committee that includes five librarians and five publishers.

The steering committee has retained the firm of Jones Day for legal counsel and PricewaterhouseCoopers as financial advisor to assist them in evaluating the situation. Correspondence to the ad hoc committee can be sent to adhoccommittee@nyc.rr.com. Library customers and publishers can join a creditors group on Yahoo! (http://groups.yahoo.com/group/rowecomcreditors) and receive updates from the committee.

While this banding together certainly aids information sharing and may provide more clout in negotiating, there are no guarantees the creditors will get their money or subscriptions out of the deal. By denying financial backing for its subsidiary, divine could force RoweCom to declare bankruptcy if no acquisition deal is struck.

Rumors in fact abound that bankruptcy is imminent, while others say it looks likely that some kind of deal will occur with Swets Blackwell. Bankruptcy would obviously be devastating to the creditors and the potential impact on some smaller and mid-sized libraries and on smaller publishers could be characterized as catastrophic.

On Jan. 8, divine issued a press release (posted at http://www.kstore.com), stating that a meeting has been set for Tuesday and Wednesday, Jan. 14 and 15, with representatives for RoweCom, the "two possible potential purchasers," the creditors' steering committee, and divine. A representative from the steering committee indicated that attendees of the meeting, which will be held in New York City at the office of Jones Day, will look very hard at a way to collectively reach a resolution of the issues. "Obviously," he said, "everyone at the meeting will be encouraging divine to put back as much money into RoweCom as possible."

It is interesting, but up until this happened, divine had been pushing to integrate RoweCom into the parent company under the name divine Information Services, and de-emphasizing the RoweCom/Faxon identity. When the financial crisis hit, divine seemed very deliberate in trying to separate itself from the RoweCom unit's troubles.

While it is not clear how divine can cleanly (legally and ethically) separate itself from the financial obligations of its subsidiary, it certainly seems to be attempting to do so. In one company release, divine stated that, "RoweCom had substantial cash flow issues prior to our acquiring it and while we have been able to resolve many of them, others remain."

In a separate development, divine has been forced into a partial resolution with at least one creditor who decided not to wait around for the return of its subscription money. The New York State attorney general's office filed suit against divine and RoweCom (and its various aliases) for breach of contract on behalf of the libraries at SUNY Buffalo. According to a representative of the attorney general's office, the value of the subscription contract paid by Buffalo was $1.3 million and the suit asked for $50 million in damages. The "understanding" reached last week provides an initial bridge payment of $500,000 by divine to Buffalo, while buying time until Jan. 29 for divine/RoweCom to straighten things out. The lawsuit is still pending.

A spokesperson for divine confirmed that the company has received a legal complaint from one other entity in New York State but declined to identify the plaintiff. Other creditor libraries might want to seriously consider this type of action, as it appears that waiting and hoping for a settlement to the mess could bring little recompense.

It's hard to imagine why any company would want to buy RoweCom and assume such liabilities. EBSCO and Swets Blackwell could just stand by and let divine push RoweCom into bankruptcy and pick up the customers anyway. On the other hand, the attraction of additional market share of the subscription business and the rescue of the tarnished image of the business could be worth enough to Swets. Librarians will most likely be asking vendors for a different contractual model for subscription payments.


Paula J. Hane is a freelance writer and editor covering the library and information industries. She was formerly Information Today, Inc.’s news bureau chief and editor of NewsBreaks.


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