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Cogent Acquires FNSI

It's a good time to be looking for acquisitions, especially if you're a survivor in the ISP space. If you have cash, you have the whip hand, but Cogent Communications today demonstrates that companies can make strategic moves even if all they offer is stock and the assumption of liabilities (i.e., debt and ongoing costs).

Cogent is purchasing Fiber Network Solutions (FNSI), of Columbus, Ohio, which has about 400 customers and revenues of about $6 million per year. A quick glance at Cogent's network map reveals that Cogent does not serve any markets in Ohio. The acquisition of FNSI will add the following markets to Cogent's portfolio: Cincinnati, Cleveland, Columbus, Dayton, Detroit, Pittsburgh, and Toledo.

Heavily reliant on vendor financing from Cisco for its network buildout, Cogent is searching for the economies of scale that will make the company profitable. In the acquired company, Cogent will cut costs drastically. Dave Schaeffer, Cogent CEO and founder, explained, "We want to increase the utilization of the network we have already built. We're looking for solid companies that have not yet justified the scale of their backbone. We can take those assets and redeploy them against a plan that makes more sense."

Cogent achieves an immediate cost reduction by connection FNSI's network to its backbone, taking the company off of leased circuits that can be a significant and even fatal cash drain for some companies. Schaeffer claimed that Cogent's network includes fiber that runs through the FNSI cities but which has not had drop off points in those cities.

As in any merger or acquisition, further cost reductions can be achieved through the elimination of duplicate staff. In the ISP world, some network monitoring, reporting, and even billing equipment can be eliminated, further reducing monthly expenses.

Like many companies that are competing with the RBOCs, Cogent knows it cannot compete for the most lucrative contracts, but feels that it can provide better customer service to customers seeking smaller contracts, such as small- and medium-sized businesses.

On September 30, 2002, the company reported that it had $50 million in cash, but had realized an extraordinary cash gain of $70 million when it purchased Allied Riser. During the nine months ending last September, the company used about $26 million in operating costs, leaving it with almost two years' worth of cash. Time is tight, and Cogent needs more deals like that announced today. Given the state of the market and the economy, it should be possible to find them