A Scary Monster Monster Worldwide has a cute mascot, memorable Super Bowl ads, a rising stock price--and a host of problems.
By Bethany McLean

(FORTUNE Magazine) – Over the past six years one of the constants of the Super Bowl telecast has been the Monster.com commercials. In 1999, even before a wave of cash-drunk dot-coms began spending far too much of their IPO proceeds on Super Bowl ads, Monster got the crowds talking with its tongue-in-cheek "when I grow up, I want to... " ads. After the dot-com boom turned to bust, Monster never flinched. Indeed, in 2004, Monster will double its Super Bowl presence, spending millions for three ads.

In some ways Monster seems like the classic dot-com that made it through the dark years. It's on the short list of companies--along with the likes of eBay, Amazon.com, Google, and Yahoo--that people instantly associate with the Internet. Just as Google now stands for Internet search, Monster stands for online jobs. It has created a new business model and forced offline companies--in this case, newspapers--to compete with it on its terms. It's made its CEO, Andrew McKelvey, one of the richest men in America. And like the other big Internet brands, it has seen its stock rise dramatically this year: Since March, Monster's stock has tripled, giving it a P/E ratio of about 60 times this year's earnings estimates.

But that's where the neat comparisons end. Monster, it turns out, is not like other Internet companies--and that's not necessarily a compliment. Indeed, Monster is one of the stranger corporate ducks you'll ever come across. For one thing, it is not a pure Internet company. But the offline businesses, rather than propping up the Internet division during the bust, have been either busts themselves or in steady decline, putting immense pressure on the online job site to carry the entire company. Unlike eBay, whose hold on the online auction business seems nearly impregnable, Monster is under assault from toughened competitors. The real question about Monster right now isn't whether the stock is poised to keep rising--it's whether its underlying financials even remotely justify its current gaudy price.

The Monster Express

The company that is known today as Monster Worldwide began life back in 1967 as TMP Worldwide. Its founder, McKelvey, was a young entrepreneur who, with an initial stake of $18,000 (all borrowed), began buying up small businesses--literally hundreds of them--in two main areas. One, "directional marketing," helped companies place ads in yellow pages. The second, "recruitment advertising," helped employers design ad campaigns to entice prospective workers. In 1995, McKelvey bought a small, Boston-based, recruitment-advertising firm started by a born salesman named Jeff Taylor. A little something Taylor had started on the side, called the Monster Board, which brought together job seekers and potential employers, came along with it. Thus did McKelvey fall into the Internet.

It didn't take him long to figure out what he had. Although the new Internet division generated next to nothing in revenues, Monster gave McKelvey something he could sell to Wall Street--which he did. In 1996, TMP went public. Remember, that was just a year or so after the Netscape IPO had changed all the rules.

There were always supposed to be "synergies" between TMP's businesses. And indeed, in the early years there were synergies. Monster, which was a money-loser until the late 1990s, got funds from its parent company. TMP's offline advertising businesses gave Monster entree to companies that might have dismissed the Internet. In the latter half of the 1990s, McKelvey began buying up staffing and executive-search firms. The idea was that you'd land your first job, your last job, and everything in between using some part of the TMP empire. "Intern to CEO" was the company's tag line.

As for Monster.com, it was unstoppable. Its business model was simple: Job seekers could post their resumes for free--and companies would pay to list jobs and to get access to those resumes. Monster sold itself as cheaper and more effective than newspaper classified ads. And when newspapers tried to fight back, particularly through a jointly owned online site, CareerPath.com, they were eaten alive by Monster.

The site catered mostly to FORTUNE 1,000 companies seeking tech workers, for whom there was a seemingly inexhaustible demand. Monster hiked its prices aggressively. Its revenues soared from next to nothing to $536 million in 2001. TMP's other divisions, driven by a steady diet of acquisitions, did decently. But it was Monster that made everyone rich. At its peak in 2000, TMP's stock sold for $87 a share. McKelvey, who owned 60% of TMP's shares after the IPO, was suddenly worth more than $2 billion, which only enhanced his reputation for living large. (He's been married six times, and he likes very large yachts--see box.)

"They were flying so high, they didn't know how high was up," says one former employee. And then, of course, it all came crashing down. Even in the dot-com bust, however, the Monster division remained the star. Though its revenues fell a painful 22% between 2001 and 2002, that was positively rosy compared with TMP's offline staffing and executive-search division, which began to bleed money. In early 2003, after cost-cutting initiatives failed to fix the situation, TMP spun off its staffing and executive-search operations and renamed itself Monster Worldwide. To complete the spinoff, Monster had to fork over $50 million in cash just to support the new company. (Renamed Hudson Highland, the staffing and executive-search operation continues to lose millions; this summer it wrote off $203 million in goodwill--an amount larger than its entire market capitalization.)

Today McKelvey freely admits that the staffing and executive-search strategy didn't pan out. "On paper it looked like great synergy, but it doesn't always work that way," he shrugs. Nonetheless, TMP executives got bonuses of $1.8 million for completing the spinoff, including $800,000 for McKelvey, which, as one former employee says, is a little bit like paying the arsonist to put out the fire.

What's more, the whole Hudson Highland fiasco wreaked havoc on TMP's finances. In the days when TMP was buying every employment-related business it could get its hands on, it took "merger and integration" charges every quarter. From 1998 to 2002 those charges totaled $238 million. Add $178 million in 2002 reorganization charges--cost cutting and the spinoff--and you've wiped out almost 70% of operating profits over those five years. Oh, and toss in a $428 million goodwill write-off--an acknowledgement that the businesses TMP acquired weren't worth what the company paid for them. In general, a profitable company should show growing "retained earnings"; at the end of 2002, TMP had a retained deficit of $478 million. At the same time, shares outstanding have exploded from 60 million at the end of 1998 to over 100 million today.

Although Monster Worldwide is now free of Hudson Highland, it's hardly free of problems. Its recruitment-advertising and yellow-pages businesses--the latter run by McKelvey's son Stuart--are both facing a long-term slow decline on top of the current trauma caused by the brutal economy. In part because of these divisions, Monster Worldwide has taken another $48 million in restructuring charges in 2003. The cash on its balance sheet has fallen from $166 million (restated for the spinoff) to $118 million; cash flow from operations was a negative $16 million in the first nine months of this year. Although the company says it does not want for cash, it plans to raise some $150 million by selling shares; its filings warn that "we have substantial cash commitments."

In other words, there's a lot of pressure on the Monster division not just to grow, but to grow fast enough to make up for the decline in the other businesses. Yet in the first nine months of 2003 its revenues--which constitute 60% of the company's--are flat vs. 2002.

So can the Monster division carry the company on its back? On the surface, the Monster board does what it always did: It matches job seekers with jobs. In fact, its business has changed dramatically. There are no tech jobs, which means FORTUNE 1,000 companies hardly need to pay Monster to fill them. So the company has targeted other kinds of workers: health-care, government, even blue-collar workers. Of those, the one that Monster has talked up the most--and the one that represents the greatest departure from its former focus--is the blue-collar faction, labeled "hourly and skilled jobs," which makes up anywhere from 50% to 75% of the U.S. workforce. The importance Monster has placed on that effort is underscored by its 2003 Super Bowl ad, which featured a driverless truck careering out of control while an unemployed truck driver drank coffee.

McKelvey explains the new strategy this way: "The marketplace is bigger than we realize." Adds Monster.com founder Taylor, whose title is "chief monster": "We decided to fish where the fish are." But hourly and skilled jobs are the stronghold of the local newspapers, and this time it's no sure thing that Monster will be able to steal the business from them. McKelvey says progress is "good"; today 21.6% of U.S. job postings are skilled and hourly, vs. 14.9% before the Super Bowl launch. But apart from that, the company is reluctant to talk specifics, and industry watchers say they haven't seen any real signs of success.

Indeed, the newspapers finally seem to be having some success in fighting Monster. Three of the largest newspaper companies in the country, Gannett, Knight-Ridder, and Tribune, now jointly own an online job site called CareerBuilder.com, which is a successor to CareerPath. Although Monster is still No. 1, CareerBuilder is gaining ground. According to comScore Media Metrix, the number of monthly visitors to Monster has dipped 19% over the past year, to 15.3 million, while CareerBuilder's has grown 37%, to 6.2 million. (HotJobs, a third competitor, which is owned by Yahoo, has also grown.) CareerBuilder is private, but chief operating officer Matt Ferguson claims that revenues increased 9% sequentially in the second quarter and 15% in the third quarter. Perhaps most important, research firm Corzen says that in the top 100 markets, CareerBuilder overall has more jobs listed.

And CareerBuilder is competitive with Monster on price in a way the newspapers never were. Monster's list price is $335 for a 60-day job posting. For $360, that same employer can get not only a posting on CareerBuilder but a ten-line listing in, say, the Chicago Tribune as well.

Recently Monster lost something else to CareerBuilder: its status as the exclusive job site on both AOL (which includes FORTUNE.com) and MSN. CareerBuilder picked up both pacts.

Monster described this as a "strategic decision." Although the deals produced 20% to 25% of its traffic, they cost $50 million a year. Taylor argued that Monster will use the money more effectively in other advertising, that the conversion of the AOL and MSN traffic into Monster members was weak, and that anyway, it had too much traffic. "The point no one has gotten is that just because traffic goes up doesn't mean sales go up," says McKelvey.

Monster may well have a point. Companies have long complained about the torrent of inappropriate resumes they receive in response to job postings. But CareerBuilder's Ferguson says that "traffic is everything"--companies may complain, but they pay for the site that delivers the most applications. Many say that Monster wanted to hang on to at least one of the pacts; Peter Zollman, the editor of Classified Intelligence Report, says calling it a "strategic decision" was "essentially a flat-out lie."

There are plenty of other sources of competition for Monster. Peter Appert, a publishing industry analyst at Goldman Sachs, thinks that newspapers, many of which now have their own online sites, will be able to hold their own. He says that excluding CareerBuilder, online share of the market has remained flat at about 12% over the past few years.

In addition, some big companies have cut down on their use of online job boards, turning instead to their own websites to recruit. In 2002 major employers, including IBM and Intel, formed a site called DirectEmployers. It's run by Bill Warren, the former president of Monster, who says that "third-party sites will be a thing of the past" for big companies. Warren may not be impartial, but there's some research to back him up. Wachovia analyst Mark Marcon, who conducted a survey of 49 corporate recruiters, says that they preferred Monster to other outside online sources, but their top recruitment vehicles were their own websites. Marcon predicts that next year, for those large companies, "e-cruiting budgets will not increase meaningfully even if hiring picks up." (He does predict a bigger increase in 2005.)

What effect is that having on Monster's pricing? CFO Mike Sileck says there's been "very little pricing pressure" with the resume database and a "modest" amount for job postings. But many others say otherwise. "Customers of Monster we talk to have said that they've been able to extract pretty significant concessions to keep them as customers," notes analyst James Janesky of Janney Montgomery Scott in a report. Mark Gambill, the vice president of marketing at Manpower, a Monster client, says of the job boards that "all of them are now being fairly reasonable." He attributes this to both the economy and the competition.

"Hastening The Inevitable"

Over at Monster's Manhattan fortress, Andrew McKelvey sounds unruffled. Yes, he's made mistakes, and yes, Monster Worldwide has some divisions that are struggling. But when it comes to the online job site itself, he voices no worries. He is quick to note that Monster is still more than twice as big as CareerBuilder, and claims that because some of CareerBuilder's postings are just add-ons to newspaper ads, he doesn't think they should count. But he also says that the other online players aren't really his concern. His ambitions are larger than that: "We will get to $1 billion in revenues by enlarging the market and by taking business from newspapers."

McKelvey also thinks that CareerBuilder is actually helping his cause. "The newspapers' answer to Monster is CareerBuilder," he says, and CareerBuilder is "only hastening the inevitable." He points out that high school kids are all online. "You mean when it's time to look for a job, they're going to turn to the newspaper?" he asks. What, he adds, will happen to CareerBuilder when companies say they just want to place ads online and not in the paper? What's the newspapers' motivation? "We've never been able to figure that out," he says.

Taylor is equally emphatic that Monster's best days are still ahead of it. By his wild-eyed estimate, the total market for all types of employment recruiting stands at $250 billion. "We can't expect to control 100% of that." As for the past few difficult years, Taylor says he tells employees, "We're not perfect, but we always get stronger."

Indeed, not every sign is grim. In the third quarter, the company's cash flow from operations was positive, and Monster's deferred revenues--longer-term contracts that have been signed but not yet booked as revenues--ticked up. "That's setting us up for a nice year," says CFO Sileck. Says Brian Lee, chief strategist at Hunt-Scanlon: "Monster has lots of competition, but they're going to stay on top."

But if everything is so good, why don't Monster insiders seem to have more faith? Jonathan Moreland of insiderinsights.com points to the lack of buying among insiders even when the stock was way down. He says, "I can't say definitely short it, but I would say don't buy it." Newly appointed chief operating officer Bill Pastore just exercised options on 133,412 shares and promptly sold them all. But McKelvey is the main reason that Moreland calls the Monster executives "serial sellers." In early 2000, McKelvey owned 26.5 million shares; by spring 2003 he owned just 12.9 million. He's reaped almost $300 million through stock sales in the past few years, according to Thomson Financial, and continues to sell roughly 20,000 shares a month.

McKelvey says he sells stock to fund his lifestyle, and points out that he doesn't take any options anymore. Plus he's cut his salary from $1.5 million in the mid-1990s to just $200,000 today. (He does, however, own almost 70% of a partnership that leases office space to the company for $46,200 a month; two other Monster insiders own another 15%.) McKelvey also sells in order to fund his charitable contributions. "When you make money, you have an obligation to give it away," he says. In 2000, upset by the lack of progress in gun control, he founded a group called Americans for Gun Safety, to which he's contributed at least $12 million. And he and his sixth wife, Dena, started the McKelvey Foundation, which by next fall will have funded the college education of nearly 400 rural students with entrepreneurial bents. McKelvey proudly displays a chart showing an increase in the percentage of kids that go to college from schools that offer his scholarship.

There is a scenario that could make all of Monster's issues moot, which is a repeat of what made Monster in the first place: a plethora of jobs and a dearth of employees to fill them. Monster executives can't fathom any other possibility. "Absolutely, it will be an employee market," says McKelvey. Talk to Taylor, and he might even convince you that we'll see the "worst labor shortage in our lifetime by 2010." Maybe they'll be right.

But what if they're not?

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