IN MAY 1999, LAURENT PAULHAC presented his little-known startup to some of the nation's biggest companies and won the chance to build them a website to support important financial transactions -- and in the process make his new company profitable.
Like others with Internet ambitions, CEO Paulhac brought an entrepreneurial zeal to the table. But his company, Prescient Markets, was also smart enough to grab an expert partner well-known to his prospective customers when the opportunity came along. Now Paulhac and his team are busy building add-on services and planning future expansion of the Cpmarket.com site.
More on Cpmarket.com's business model in a moment. First, here's a brief primer about what's traded on Cpmarket.com -- the "CP" in the website address. CP stands for commercial paper, which is a short-term note that allows large companies like Ford and Citigroup to float millions of dollars in debt from one to 270 days. Often, it's a way for these companies to manage their cash flow. The buyers of commercial paper -- mostly institutional investors and large financial institutions -- loan large chunks of money to the CP issuers, who agree to pay the money back after the set period with about 6 percent interest. The Security and Exchange Commission estimates that at any one time there's about $1.5 trillion in outstanding CP.
AT A GLANCE
The Company: Prescient Markets
Employees 50 Headquarters White Plains, N.Y.
Founded February 1999
Funding $4.5 million from private companies in November 1999; $15 million in August 2000, led by TH Lee.Putnam Internet Partners
Mission Providing an online trading platform for large issuers of short-term notes of corporate debt
Key move In August 1999, Prescient partnered with Bridge Information Systems to provide back-end support for its planned trading site
In between the buyers and sellers is a broker, and that's where a business like Cpmarket.com comes in. It makes money not from buyers (who are given access to the site free of charge), but by charging the issuer, or seller, a small percentage commission.
It's into this world that Paulhac brought Prescient Markets. In spring 1999, Paulhac pitched this plan to some of the world's biggest corporations: Let Prescient build a website that will become a central place for both issuers and buyers of commercial paper to do business. It'll provide all the back-end support and security required. And the company will make it easy to use and cheaper than traditional means. (Paulhac says Cpmarket.com expects to attract sellers by making his fees about half traditional broker rates, which run between 0.02 percent and 0.05 percent.)
It was an attractive idea. Thirteen others, including London-based Reuters Group, State Street Corp. of Boston, Armonk, N.Y.-based IBM and New York City-based TradeWeb, received requests for proposals for the same project. A group of 19 major commercial paper issuers called the Direct Issuers Working Group (DIWG), including General Electric Capital Corp., Ford Motor Co. and American Express, conducted the RFP process.
Prescient Markets' win was a testimony to Paulhac's knowledge of his customers and his formation of a partnership with New York City-based Bridge Information Systems, one of the largest providers of financial data and technology in North America. David Rutter, president of Bridge's e-commerce arm, eMarkets, says that Paulhac knew the CP market and how it worked, "and we're a large global market data company. It ends up being a pretty compelling partnership. But I don't think either [of us] would've won it alone."
The 19 companies in the DIWG thhat issued the RFP became Cpmarket.com's first customers.
These companies issue commercial paper on Cpmarket.comAmerican Express Credit Corp.
Associates First Capital Corp.Chevron Corp.
CitigroupThe CIT Group
DaimlerChrysler Corp.Deere & Co.
Deutsche Bank FinancialExxon Mobil Corp.
Ford Motor Credit Co.GE Capital Corp.
General Motors Acceptance Corp.Heller Financial
Household Finance Corp.LaSalle National Corp.
National City Corp.Prudential Funding Corp.
Sanpaolo IMI S.p.A.Sears Roebuck Acceptance Corp.
TexacoWells Fargo Financial
The Cpmarket.com story starts even before the RFP existed. Out of college, Paulhac, 31, had worked first as a consultant and then for several years as a software developer at financial services companies. By 1998, he had decided to strike out on his own to develop an electronic platform for a high-volume commodity. He decided on commercial paper; while a few CP issuers had started to sell their own paper directly via their websites by that time, no one offered a centralized CP trading platform.
From the beginning, Paulhac's business model was to achieve critical mass. It's the Priceline.com model of doing business. First, you get a few companies -- whether it's airlines, grocery stores or, in Paulhac's case, CP issuers -- that are willing to sell products online. Then you go after consumers. Then you go back to sign on more companies, and the cycle begins: As more consumers sign on, more companies sign on. Eventually the site succeeds.
Paulhac's first move was to meet with eight corporate treasurers, learn more about the market and try to get a few of them to sign on. While they expressed interest, none of those issuers (who were all members of the Direct Issuers Working Group) felt they could hand the job to a startup without an evaluation process. So in April 1999, shortly after Paulhac had met with the issuers, the group sent its RFP to 13 companies.
Paulhac knew he faced a huge obstacle in competing against other bidders: credibility.
by Dana Stiffler
Here's the mantra: Technology is revolutionizing global capital markets. Better access to information democratizes markets and cuts trading costs. These trends will squeeze Wall Street profit margins. Heads will roll.
Well, yes and no. Mostly no, in fact. The operational guts of most trading processes remain essentially unchanged, five-plus years into the Internet era. This is particularly true in the fixed-income arena, a huge market where Prescient Markets is one of a handful of IT providers that has managed to thrive. Because established players have a great deal riding on the status quo, success here depends on achieving a fine balance: Provide a solution that is good, but not too good, and don't step on anyone's toes.
Prescient Markets has succeeded in doing exactly this by zeroing in on commercial paper (CP), a market where volumes are high, margins are thin and no significant secondary market exists. In other words, most dealers are not as tenacious about protecting their CP operations as they would be about, say, their municipal bond business. Also comforting from the large corporations' point of view was the fact that Prescient Markets was not trying to reinvent the wheel. These companies had already issued commercial paper directly for a while; in the past year, Ford Motor Credit and American Express have issued CP from their websites. Prescient Markets improved the process by aggregating this activity and putting it online, resulting in benefits for issuers and investors alike.
Prescient did well to partner with Bridge, a known quantity with a global presence. Despite Bridge's financial difficulties and the stability of its systems, it's hard to see Prescient claiming that its platform would be capable of shouldering Ford and GMAC's commercial paper operations without Bridge. Another crucial step was securing substantive support from some very heavy hitters in the Direct Issuers Working Group, particularly GE Capital. GE Capital's part in the Cpmarket.com pilot test made all the difference.
Now comes the hard part. Since commercial paper is essentially a commodity market, it is inevitable that someone will undercut Prescient, possibly a large investment bank, possibly Bloomberg or Reuters. Prescient's efforts to offer value-added functions (debt management software, integration tools) and excellent customer service will therefore become increasingly important. As for expansion, the lateral move into the burgeoning European CP market makes good sense. However, if Prescient moves upstream into occupied e-markets, such as municipal securities, they will be extremely hard-pressed to compete.
Dana Stiffler is an emerging trading technologies analyst at Meridien Research in Newton, Mass. She can be reached via e-mail at email@example.com.
The solution came in the form of a man named Tom Wendel, then CEO of New York City-based Bridge Information Systems. (Wendel retired in October 2000 and was not available for an interview.) The two were introduced by a mutual friend, and Paulhac told Wendel about the upcoming RFP, which would also be going to Bridge, and of his hope to win the bidding process. After 45 minutes, Paulhac says, Wendel interrupted him and suggested the two collaborate on a website proposal.
Bridge's technology infrastructure (including its St. Louis-based Technology and Trading Center) solved Paulhac's credibility issue. In May, Prescient and Bridge submitted a joint bid to the issuers' group. Eight weeks later, the group announced the two companies had made the short list.
The issuers' technical committee arrived first, in late July, and Prescient's new offices still reeked of fresh paint. Paulhac and his staff showed the committee a prototype of the website, including how transactions would be made. The Prescient staff and committee members then packed into a limousine that took them to the White Plains airport where Bridge's private jet awaited and whisked them off to Bridge's St. Louis technology center.
"Prescient was able to bring forward a full-blown solution," says Sigal Zarmi, assistant treasurer of IT at GE Capital and a member of the technical committee. "They had stress testing, volume testing and 24/7 technical support."
Three more Q&A sessions followed. The next week, Paulhac presented to the issuers' business committee with Wendel at his side. Two weeks later, Paulhac and Rutter, the head of Bridge's e-commerce arm, answered four hours of additional questions. Finally, two days later, Paulhac was called to Newark, N.J., to answer a few last questions and learn his team won the bid. "It was Dom Perignon in the Prudential Center," Paulhac says.
Bridge, which owns a minority stake in Prescient, filed for Chapter 11 bankruptcy protection in February. Bridge continues to operate -- and to provide website hosting and financial markets information services to Prescient. In March, Paulhac said Prescient was continuing with this arrangement as the company evaluated alternatives.
Once selected, Prescient, which named its website Cpmarket.com, worked to get agreements from all 19 members of the DIWG. (Since then Paulhaac has added a few more issuers.) And while none of these issuers committed to putting a certain percentage of their transaction volume on the site, four members of DIWG decided to invest in second round financing along with TH Lee.Putnam Internet Partners.
GE Capital was one of seven issuers that participated in a pilot of Cpmarket.com in May 2000, and by late October, the company began running some major volume over the site.
"Right now, [GE Capital's] transaction volume over Cpmarket.com is less than 5 percent," says Mark Barber, vice president and assistant treasurer of GE Capital. GE issued $3 trillion in commercial paper in 1999, and if GE's transaction volume on Cpmarket.com was a modest 3 percent that would be $90 billion in notes being sold through Cpmarket.com, giving Prescient Markets a commission of at least $9 million. (Again, most dealers charge a commission of between 0.02 percent and 0.05 percent, and Paulhac claims to halve those rates.) That's not bad, given that GE Capital is just one of Cpmarket.com's 26 issuers.
Next come the traders. Trading firms that sign up with Prescient establish passwords and accounts for individual traders and then establish agreements with issuers, who must set their systems up to accept trades from each subaccount. Finally, Paulhac will go back to attract more issuers and so on.
In March, Prescient announced it had issued $50 billion in commercial paper on Cpmarket.com since its June 2000 launch. Paulhac says he expects to reach break-even in mid-2002.
Nuts and Bolts
There are two ways to enter the Cpmar-ket.com site -- as an investor or issuer. Each brings up slightly different menus and screens.
The CP buyer, or investor, has five basic buttons. The first two allow the investor to see interest rate information and make trades in one of two environments: HTML or Java. The Java option automatically updates real-time information. The HTML version currently refreshes every two minutes and will soon refresh every 30 seconds. Tools on the site allow investors to do a quick rate analysis. "It allows me to comparison shop and immediately execute," says Joe Tully, managing director at Prudential Global Asset Management in Newark, N.J., who buys CP using the site and does, on average, 5 percent of his trading there.