Between 1997 to 2001 voice and data service providers were being rolled up as fast as they could start up. In 1998, the top ten telecom deals in the U.S. amounted to over $200 billion. In 1999 MCI WorldCom, AT&T, Vodafone, SBC, and Qwest all announced or completed transactions that ranked among the 10 largest mergers and acquisitions in telecom history.
Some of these deals were friendly — some were not. All told, telecom takeovers accounted for 18 percent of the record setting $3.1 trillion in mergers and acquisitions in 1999.
Those companies that didn’t have the liquidity to buy up rivals opted for a more organic approach to growth — they built out bulging networks and data centers at a staggering pace — accumulating vast amounts of long-term debt for each new facility. State of the art data centers popped up around the globe just waiting for a gold rush of dot-com-crazed customers to flood their servers.
Then everything changed. Mergers and acquisitions slowed to a trickle after federal regulators approved America Online’s acquisition of Time Warner in January 2001. Network build outs and fiber digs hit the brakes when the flood of new dot-com customers turned to a drought. But something was amiss — there were more lines and servers than customers — supply overshadowed demand. Resulting price cuts for carrier services translated into reduced revenues. Missed forecasts and diminished earnings drove stock prices tumbling and consequentially debt soared.
Nowadays, the real price of growth by acquisition and build-it-and-they will-come business strategies includes unhappy stockholders, tarnished corporate careers, a trip through bankruptcy court, and disillusioned customers.
But bankruptcy does not necessarily translate into the death of a corporate entity — far from it. Filing for bankruptcy protection in today’s economy is really just another type of exit strategy. Granted, none of these voice and data carriers entered the market with a bankruptcy protection as a core exit strategy, but several firms are proving that bankruptcy is an efficient business practice for re-entering the market. One of these companies is Globix Corp., a global backbone provider that also operates five content delivery networks in the U.S. and U.K.
Globix recently emerged from Chapter 11 proceedings a leaner organization, nearly debt-free, and very eager to take on new clients. The company used a type of bankruptcy that is becoming ever more popular, especially in the telecommunications market. The Globix bankruptcy proceeding was a pre-packaged deal.
Rather than having a bankruptcy judge act as a mediator between different lenders and Globix, the company prepared all of the research for the court and extended non-binding agreements with all parties before filing for bankruptcy. In this way, Globix was part of the solution, instead of just being part of the problem. When the company filed for bankruptcy it had all the agreements in hand to begin rebuilding. So the judge simply rubber-stamped the petition, once Globix convinced the court that the filing was made in good faith.
As part of its pre-arranged financial restructuring, bondholders agreed to exchange current debt worth $600 million for $120 million in senior secured notes, due in 2008 with interest rate of 11 percent payable in kind for up to four years. This relieved Globix of approximately $75 million in annual cash interest expenses on the existing notes. There will be no cash interest payable on the new senior secured notes for up to four years.
If Globix’s Chapter 11 plan succeeds, it will emerge with just $120 million in debt instead of $1.08 billion — with no interest payments due until 2006. A revitalized organizational plan accompanying the new financial terms might allow Globix to reach profitability by the end of this year — with fewer employees, smaller facilities, and slower growth.
In May, the company shuffled Peter Herzig out of his chief executive officer slot, naming him Vice Chairman of the Board of Directors. Globix board member Peter Stevenson was named president and CEO of the company, replacing Herzig.
Stevenson has a tenured telecom — he is a 14-year veteran of Bell Atlantic Corporation (now Verizon), where he served in various management capacities, including managing director of corporate development.
Stevenson is also affiliated with Communication Technology Advisors LLC, a firm that served as a financial operational advisor to the Globix bondholders during the company’s Chapter 11 proceeding and continues to provide consulting services to Globix
Stevenson believes that Globix has strengthened the platform from which to promote its capabilities as a global provider of advanced Internet hosting services, network and applications solutions, as well as backbone and content delivery services.
The question that remains is whether customers will flock back to the beleaguered network service provider. According to Navarrow Wright of BET Interactive, parent of the popular Web destination BET.com, Globix services have never been better.
“We have been pleased by the way that Globix has handled the Chapter 11 process and communicated with us throughout,” Wright said. “The excellent service we have always received from Globix has remained unchanged during this period. Using Globix services has allowed us to remain a leaner business in our own highly competitive marketplace.”
So for Globix at least, its bankruptcy has paved a path toward recovery — or at least hold the potential for future success in spite of earlier excess.
Patricia Fusco is managing editor of ISP-Planet, a sister publication of atNewYork.com