Bethlehem, Pa.-based ISP FASTNET Friday acquired privately held Conshaucken,
Pa.-based Netaxs/Earthstation.
Netaxs’ ISP clients include New York City-based Panix. Terms of the deal were not announced. The companies expect to find cost savings as well as additional revenue opportunities in the merger.
Netaxs combines a local ISP business — even dialup, in which it has
carved out a specialty niche by supporting UNIX and Macintosh OS users — with
an East Coast backbone built around a collocation center in Philadelphia, Pa.
Netaxs’ Chief Technology Officer Avi Freedman and its Chief Executive Officer Jeff Pasquale will stay with the merged entity. Although their exact titles were not yet announced, it is clear that Avi Freedman will provide technical expertise and Jeff Pasquale will get back into the business of acquiring customers.
“Jeff is a great guy,” said Stephan A. Hurly, president and CEO of FASTNET. “He built up Earthstation into an
enterprise that Avi felt was good enough to merge with. Jeff is a real entrepreneur and is very good at landing new business.”
FASTNET does not have a backbone. It has data centers (which it calls regional Customer Network Facilities) in 10 locations: Wilkes-Barre, Bethleham, Harrisburg, and Philadalphia,
Penn.; Pennsaucken, Princeton, Basking Ridge, and Jersey City, N.J.; New
York City; and Washington, D.C.
In its last 10-K, submitted to the SEC on April 1, 2002, FASTNET claimed
approximately $12 million in cash and cash equivalents as of December 30, 2001 and noted
that its biggest business challenge was to distinguish itself from its
competitors. The company had lost Microsoft WebTV Networks account on Septermber 30,
2001, which had provided 8 percent, 20 percent, and 21 percent of total revenues
for the years ended December 31, 2001, 2000, and 1999, respectively.
At the end of 2000 and during 2001, FASTNET terminated 44 employees,
bringing FASTNET’s total empoyment down to 106 full-time employees and two part
timers. Netaxs has approximately 60 employees.
Merging FASTNET’s corporate customers (FASTNET defines its core business
as serving enterprises with over 100 employees) and customer service-oriented
business with Netaxs’ backbone and focus on technology should create many
synergies. The companies are not far from each other in Pennsylvania, so most
employees should find both offices easy to get to, and the only areas of data center
duplication will be in Philadelphia, New York, and Washington, D.C.
The difference between the two companies is most obvious in their allocation
of resources. Of Netaxs’ 60 employees, about half are technical, one-quarter
are sales, and the remaining quarter are everything else from administration
and human resources to management. Of FASTNET’s 108 employees, 22 are
engineers, 10 are in the Network Operations Center (NOC), 30 are involved in customer
care and in managing customers’ networks, another 30 handle administration and
management, and the remaining 14 handle sales and marketing.
“I come from a banking background,” Hurly said. “When I came in as CEO of
FASTNET over a year ago, I did a profit and loss accounting of every expense. I
found that our Microsoft WebTV account brought in a lot of revenue but was not
profitable.”
He also cut employees, especially in marketing, but made sure that
customer care was not affected.
Hurly noted, as if it were a cardinal rule of the ISP business, “At the
end of the day there is no better care than highly trained employees answering
the phone.”
Hurly also cut costs by improving network management systems so that
fewer technical employees were required to monitor the network.
Finally, he started getting out of telco contracts. Most of his telco
leases have already expired or expire this year. When asked whether he knew he
was going to buy Netaxs last year, he demurred, but did say that any ISP still
paying according to a contract negotiated at the height of the boom could
probably get a better deal now. Hurley was so certain that he could do better that
he even bought out of some contracts.
Hurly expects few, if any, layoffs to result from the merger. “We’re
still a growing company and in Netaxs, we purchased a company that will improve
our financial performance. We’re not following the Verio model, which acquired
scale in revenues. We are focused on cash flow. We do still see opportunities,
and it is a buyer’s market. We’re not announcing the terms of the deal, but in
general we do equity-based deals, and it’s a tremendous vindication of our
business that people who spent a decade building their business will merge with us
for equity.”
Hurly is optimistic about the future. “There will always
be room for super-regional providers. We believe that we will be the first
profitable Internet enterprise to hit the $50 million revenue mark. While the massive
ISPs of the world are focused on their billion dollar accounts, we can do very
well working the multi-million dollar accounts that they ignore.”
Alex Goldman is associate editor of ISP-Planet.
