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Vol. 20 No. 2 — February 2003

Many observers are blaming divine for "stiffing" the creditors (just where did the money go?), and some are calling the company the "Enron" of our industry. Initial estimates of the lost subscription funds range from $33 million to $80 million, though some speculate the actual amount could be even higher.

In late December 2002, divine announced that it intended to divest RoweCom, which it had purchased in November 2001 for $14 million in stock. According to divine, EBSCO agreed to buy the European RoweCom business, and Swets Blackwell had expressed interest in "acquiring some or all of the RoweCom operations worldwide." Rumors about bankruptcy or an acquisition were still swirling in mid-January as we went to press with this issue.

Following its acquisition of RoweCom, divine had integrated the unit into the parent company under the name divine Information Services and pushed to de-emphasize the RoweCom/Faxon identity. When the financial crisis hit, divine seemedvery deliberate in trying to separate itself from the RoweCom unit's troubles. In one company press 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."

Creditors, Buyers Negotiate

Leading creditors have formed an ad hoc committee to investigate the situation and negotiate with RoweCom/divine on behalf of libraries and publishers. This body met by telephone on Dec. 27, 2002, and appointed a steering committee that includes five librarians and five publishers. The steering committee retained the firm of Jones Day for legal counsel and Price-waterhouseCoopers as a financial advisor to assist it in evaluating the situation.

On Jan. 14 and 15, a meeting was held in New York that involved representatives for RoweCom, the "two possible potential purchasers," the creditors' steering committee, and divine. As this issue went to press, we had not learned the details of this meeting. RoweCom/divine had told customers that it wouldhave some news for them by Jan. 18.

A group of STM publishers also met in New York on Jan. 14 and 15. According to a newsletter issued by Swets Blackwell on Jan. 10, the company had delayed submitting a final purchase bid until this meeting. On Jan. 15, following the meetings, another Swets Blackwell newsletter stated: "While a final agreement has not yet been reached between Swets Blackwell and divine for acquisition of the Faxon/RoweCom business unit, the lead negotiators are continuing their good-faith discussions to reach a definitive outcome shortly."

Informed sources indicate that the decision to acquire RoweCom from divine may hinge on the European operation, with Swets attempting to block the announced acquisition by EBSCO with an offer to buy the whole concern.

Swets Blackwell further urged library customers to obtain holding lists from divine and submit them to Swets for a quotation "should the customer contemplate the transfer of the journal management to Swets Blackwell. When transferred, this will save valuable time getting orders submitted to publishers and minimize service disruptions."

In December 2002, Swets Blackwell announced the Feb. 1, 2003, opening of its Ottawa-based Canadian sales and customer support office. In the Jan. 10 newsletter, the company announced the employment of four additional customer-support staff members and one Canadian sales manager, Stuart Silcox. "The new staff members are all former RoweCom Canada employees displaced by the recent downsizing. This brings the total number of Swets Blackwell Canada staff to 10."

Legal Actions

divine has been forced into a partial resolution with at least one creditor that decided not to wait 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 State University of New York­Buffalo's libraries. According to a representative of the attorney general's office, the value of the subscription contract that Buffalo paid was $1.3 million. The suit asked for an additional $50 million in damages. The "understanding" reached in early January provided an initial bridge payment of $500,000 by divine to SUNY­Buffalo, while buying time until Jan. 29 for divine/RoweCom to straighten out its finances. The lawsuit was still pending as this issue went to press.

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. It's possible that other creditor libraries will consider this type of action, since waiting for a settlement to the mess could bring little recompense.

Impact on Libraries

The staff in libraries of all sizes has been reeling since RoweCom's announcement in December. Librarians have struggled just to discover which orders RoweCom actually placed and whether it paid any publishers. Of course, library staff are caught between a rock and a hard place here. Most can't even think about paying twice for their subscriptions. However, if the money isn't recovered and publishers won't provide subscriptions gratis, collections will be severely crippled. Patrons could lose access at a time when many are questioning why they need a library, since "everything is available on the Internet." The timing couldn't be worse.

David Gansz, director of Wilmington (Ohio) College's Watson Library, describes the initial impact of the RoweCom debacle on the school's library as catastrophic, especially given the timing. Here's the story, in his words (on Jan. 6):

Normally between semesters, we accomplish "internal" library projects that aren't feasible during the busy teaching term. Every single staff member in my library has been consumed with generating lists of subscriptions, double-checking them against Faxon's spreadsheet, triple-checking them against Faxon's Web-based subscription lists, [and] quadruple-checking to see if Faxon actually provides a check number for those subs they claim they paid, etc.

On top of that, we've had to scramble to get accurate information to rival vendor EBSCO so that they can take over our subscriptions.

Meanwhile, we've had to compilelists of every print subscription that is covered full-text in electronic databases to which we have access. Then we've had to generate a list of which subscriptions expire when and prioritize a list of which journals are so essential to the classroom curriculum that we must pay for them twice, so to speak, to ensure their availability to students.

My time has personally been spent making multitudinous phone calls to professional colleagues all over the U.S., to our reps at Faxon, to DSI, and others, just trying to get simple information regarding the status of our subs. The e-mails back and forth already number in the hundreds.

I can safely say as of this morning that Faxon has "taken us" for $28,905.73 of the $41,988.65 we prepaid them. For a small, private liberal arts college like ours, that financial loss is devastating. The time (and, consequently, money) spent by staff on this has already crippled our ability to provide quality service in other areas.

Some libraries have been examining the possibility of placing subscriptions directly with publishers, rather than using a subscription agency as an intermediary. Librarians launched into vigorous discussions about the pros and cons of this option on library listservs.

ALA had planned sessions to discuss the RoweCom situation during its Midwinter Meeting in late January. SLA posted news and links about the situation on its Web site (http://www.sla.org/content/interactive/infolinks/tellme/divine.cfm).

Impact on Publishers

Publishers are obviously very threatened by the situation. RoweCom/divine has said that its three largest, Reed Elsevier, Wiley, and Blackwell, will continue to send titles through January. Some publishers have promised to continue through March, but what happens then?

A few publishers have even offered to cover the 2003 subscriptions if libraries agree to renew for 2004. Some can afford to provide free electronic copies when that's an available option. What about the scholarly society and association publishers? Some of them barely break even. Sources have said that a few small publishers will have trouble just paying the printing costs for the next issues unless they are paid.

For scholarly journals, an attrition rate of 3 percent is generally considered "dangerously high." But, according to some estimates, the fallout from the current situation could in fact force an attrition rate of more like 10 to 20 percent. RoweCom's failure has the potential to change the face of publishing as we know it.

Impact on Subscription Agents

The situation has clearly eroded the trust factor among the parties involved--libraries, publishers, and intermediary agents. Those libraries that continue using subscription agents will most likely ask vendors for detailed contract language to protect their interests, instead of the less formal, more trusting procedures of the past. One observer commented that from now on many state fiscal agencies could insist on bonding arrangements with agents. This would then affect overall budgets.

Rollo Turner, secretary general of the U.K.-based Association of SubscriptionAgents and Intermediaries (ASA), said that the disaster at RoweCom is not typical of the industry. He hopes that "libraries will not be put off using the overwhelming majority of agents who are both financially sound and provide good service at reasonable cost." He also noted that agents provide services to libraries that are difficult and costly to replicate. ASA is in discussion with members and others in the industry to ensure that business is conducted with little or no risk to libraries and publishers in the future.

Impact on divine

The question now is, how badly has divine sullied its reputation through this mess? If the RoweCom situation is not settled soon, the negative press about breaches of contract could erode any remaining trust with its customers (current and potential) and vendors. Will the perception that it failed to honor business agreements affect its ability to sell other products and services?

The divine investor message board on Yahoo! has also been buzzing with comments from disenchanted investors. divine's stock has taken a nose dive over the last year, losing more than 90 percent of its value. The company did a 1-for-25 reverse split in 2002 as it struggled to prevent NASDAQ delisting.

divine's other services also show signs of erosion. The divine Northern Light Special Collection of 7,100 full-text sources (http://www.nlsearch.com) now carries the notice: "Effective January 1st 2003, divine has discontinued the sale of its special collection articles on a pay per view basis. Thank you for your patronage over the years and we are sorry for any inconvenience."

Librarians who have purchased divine's Virtual Reference Desk software--which is based on the NetAgent customer relations management software--worry that the move of divine's computer-development work to India may leave their operations vulnerable.

Things could get pretty ugly for the once high-flying Chicago company.