The merger
In June 2003, McCormick initiated discussions with Robert Calderoni, chairman and CEO of Ariba, a Palo Alto-based FreeMarkets competitor, about the possibility of a “strategic relationship of some form” and potentially a “business combination.” After more discussions, McCormick approached his board about the idea in September.
From the beginning, the company made clear its intent was to save money by reducing “redundancies,” including those resulting from duplicative jobs. According to SEC filings, FreeMarkets told its shareholders that a benefit of the merger would lead to “at least $25 million in annual potential cost savings, through the consolidation of redundant facilities, personnel and overhead.” Jim Frankola, chief financial officer for Ariba at the time, told analysts on a January 2004 conference call, “Of those savings, we anticipate approximately one-third to come from duplicative G&A functions, plus the one-half from redundant R&D efforts, and the remainder from other functions.”
Later that month, Michael Schmitt, Ariba’s executive vice president and chief marketing officer, told San Jose Mercury News that FreeMarkets would consolidate its headquarters into Ariba’s, with the companies trying to “eliminate redundant jobs.” That same day, the Pittsburgh Post-Gazette quoted an analyst saying it was likely “a lot of people in Pittsburgh will lose their jobs,” adding “that’s certainly what typically happens” with a merger.
McCormick told the Pittsburgh Post-Gazette, “There will certainly be redundant functions and consolidation of those functions.” In a July 2004 deposition regarding the merger, he told the court that job losses were expected “particularly in our technology development organization where our plan as part of the merged company is to eliminate that completely.” The next month, McCormick told Ariba shareholders what they “accomplished” leading up to the merger: “We have already eliminated 150 positions and have plans to eliminate another 100 positions over the next two quarters.”
Indeed, by the time the merger was complete, in July 2004, FreeMarkets had laid off or eliminated 150 positions. By December 2005, the combined company had reduced its workforce by an additional 100 employees, for a grand total of 250 lost jobs. At least 100 of those jobs were in Pittsburgh.
Calderoni defended McCormick in an interview with the New York Post, saying, “When we bought FreeMarkets, Dave insisted on keeping jobs in Pittsburgh. It really mattered to him as part of the transaction. In fact, he pushed for us to move jobs from California to Pittsburgh.”
It was a difficult time to run a startup tech company. The early aughts saw the bursting of a tech bubble that had grown during the late 1990s thanks to easy access to capital but started to pop in the early 2000s. As the Pittsburgh Gazette reported, the merger married “two unprofitable online business-to-business software and service firms that made names for themselves at the height of the dot-com boom, only to see their fortunes turn sour with the industry, forcing them to struggle to grow.”
McCormick wrote in his book that “creative destruction along with the bursting of the tech bubble eventually found its way to our sector as well.” However, he also admitted, “We didn’t move fast enough to become one of the true ‘software as a service’ companies that would eventually dominate the landscape. As CEO, I hadn’t built a team around me capable of evolving our business model quickly enough,” leading to the decision to merge with Ariba.
The merger, however, profited McCormick quite well. He became president of Ariba and a member of its board of directors, drawing $500,000 in annual salary, compared to the $350,000 he made at FreeMarkets, and was eligible for an annual bonus targeted at $300,000. He was also awarded 83,333 shares in Ariba, valued at $921,663, and 500,000 shares of stock options that had a potential realizable value between $3.4 million and $8.8 million. In September 2005, McCormick resigned as president of Ariba to work in the George H.W. Bush administration and received another $1,701,699 in severance.
McCormick spokesperson Elizabeth Gregory told WHYY News in a statement, “Dave is proud to have helped create hundreds of jobs in Western Pennsylvania during his time at FreeMarkets.”