STRATEGIES

May 29, 2002

You’d hardly know that ASP pioneer USinternetworking was in need of a financial rescue just eight months ago.

Like the proverbial phoenix rising from its ashes, USi has emerged from its Chapter 11 bankruptcy reorganization ready to take on the world with a new owner, only $70 million in debt (down from $210 million), a merger with Interpath in the works and a swagger more suited to an aggressive startup than a industry old-timer.

Read and React

“We were in and out (of bankruptcy) so fast, our sense is this has not done a lot of damage. I don’t believe that’s going to be a big problem. We were able to demonstrate to our clients that we are far more financially secure now than we were a year ago.”            — Andy Stern, CEO, USi Give us your feedback in the ASPnews Discussion Forum

“I think it’s clear to a lot of people the time has come (for ASPs) and here we are now, emerging as far and away the leader in that industry as the market starts to take off,” Andy Stern, USi’s CEO, told ASPnews.

After its merger with Interpath, which is also owned by USi’s new owners, Bain Capital, is completed in the next few months, Stern claims the combined company will be the world’s largest ASP with $150 million in revenue (based on 2001’s numbers). This year’s revenues will be less as the two company’s shed overlapping staff and operations and gear up to function as a single entity, Stern said.

Still, Stern is optimistic about the combined company’s prospects, stating Chapter 11 had not hurt it as far as its clients are concerned. Since announcing its restructuring, USi claims to have lost just one client as a direct result. Several others have disappeared due to normal attrition, the company reports.

How Many Clients Is That?
It is difficult to ascertain, however, just how many clients USi has or has had. Its Web site claims 150, but the combined companies are boasting 130 between them. Interpath highlights just 21 “selected” customers on its Web site. Stern said the 150 number may be due to USi’s posting “client units” and not just individual corporate customers on its site.

Either way, Aberdeen senior analyst Dana Tardelli notes, Bain’s $81 million backing probably kept a lot of clients from jumping ship.

“There are still a lot of believers in the ASP model,” Tardelli told ASPnews, “Bain obviously believes in the model. Going into bankruptcy with a company like Bain clearly told the world they are going to make a business out it. When you show up to a (client) meeting with Bain next to you, you get a lot of confidence pretty quickly.”

The Fall Before the Rise
So what happened? At one time, USi was the company to beat. They were among the first ASPs to go public and had Wall Street investors throwing money at them as if it were on fire.

But this, according to Stern, was the root cause of USi’s long-term problems. At the time USi was raising money and going public so were the dot-coms. This meant USi was riding the same irrational bubble and was raking in money and spending it just as fast regardless of business school logic.

“If you didn’t take the money and you didn’t spend the money, you were penalized in a big way,” said Stern. “And the result is most of the companies who didn’t, aren’t here. So, it’s awfully hard to look back and say you shouldn’t have.”

The end result of this spending spree was $200 million in debt and not enough business to carry the load. The biggest single piece of convertible debt was $125 million sold to an undisclosed investor in 1999. As a result of the restructuring, that investor is getting back $0.13 on the dollar. Other creditors, like the capital equipment leasers, are a little more fortunate and will be getting back $0.85 on the dollar.

“The problem for the company was, even with a strong operation, we were not going to generate the money to pay back $125 million in debt coming due,” said Stern. “You couldn’t bring equity into the company without taking care of that problem. That would have been a direct transfer from the investors to the bond holders.”

Chapter 11 wiped out this problem along with 140 million shares of common stock, leaving shareholders with nothing to show for their investment.

No Time for Looking Back
For most companies, coming out of bankruptcy would be a time of reflection rather than action, but, because USi’s creditors had approved its plan prior to entering court, the company’s employees began working on its reemergence months ago. This is why the seemingly sudden merger with Interpath, which offers a similar solutions set, will work, said Stern.

“We were in and out (of bankruptcy) so fast, our sense is this has not done a lot of damage” to USi’s reputation, said Stern. “I don’t believe that’s going to be a big problem. We were able to demonstrate to our clients that we are far more financially secure now than we were a year ago.”

While USi may indeed be stronger now than it was a year ago, it still has a lot work ahead of it, according to some industry watchers. Unless USi and Interpath manage to streamline their operations and focus on just a few offerings, the merger may serve to do nothing more than alienate customers, said Amy Levy, an ASP analyst with Summit Strategies.

“Here are two big vendors in this market who are combining forces and have a 130 customers; I saw the statement and it kind of under-whelmed me,” Levy told ASPnews. “One of the things I would be concerned about if I was customer is, once again, more consolidation. Hopefully, this is an attempt to really focus in on maybe PeopleSoft and Siebel and that’s it.”

“It’s a wait and see,” agreed Tardelli. “This is what this whole market is about: making customers happy and USi has to do that.”

To this end, Stern said USi will stay client-focused throughout the merger process, but plans to close its Columbus, Ohio, and Raleigh, N.C. data centers, combining the operations at its Annapolis, Md. headquarters. PeopleSoft and payroll staff in Columbus will remain and the company may actually expand those operations there.

In Raleigh, engineering and e-commerce positions will remain. Beyond that, no decisions have been made as to how many of the combined companies’ 700 employees will be let go or if the combined companies’ product set will change. In fact, the combined company does not even have a new name yet.

As far as profitability goes, Stern — unlike in days past — was loath to predict when true profits will be had. He did note USi has been EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) positive since the third quarter of 2001 and the combined companies will be EBITDA positive as well as operating cash flow positive within a few months.

Poised for a Takeoff?
So, just like evaluating the startups of days gone by, determining how high USi can fly is a matter of speculation and depends on the whims of the market. But, working in USi’s favor, according to Tardelli, is its status as a survivor. Any ASP left standing today has a good chance of finally making the idea work.

“To make it this far and to be able to learn from the past and shed a lot of debt and have good advisors like Bain, you’ve got a good shot of building a legitimate business,” he said.

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