From Red Herring:
redherring.com
Behind the Metricom meltdown
By J.P. Vicente
Red Herring
July 4, 2001
Editor's note: This article is from the August 1, 2001, issue of Red Herring magazine. On July 2, after the issue went to press, Metricom announced it had filed for Chapter 11 bankruptcy protection. The company will continue to operate its Ricochet network and is exploring financial alternatives.
It takes a lot of guts to be a Metricom (Nasdaq: MCOM) shareholder these days. Over the last 12 months, the stock of the wireless data network company plunged a scary 93.6 percent to $1.82, bringing the firm's market capitalization to a sad $56.3 million. Earlier this year, CEO Timothy Dreisbach and chief financial officer James Wall resigned, and a quarter of the firm's 770 employees were laid off.
In addition to the funding from its IPO, Metricom has burned through nearly $500 million from bigwig investors like Microsoft cofounder Paul Allen and telecom giant WorldCom (Nasdaq: WCOM) to build Ricochet, a wireless data network that, since it was launched in 1995, has attracted a meager 40,900 subscribers. On top of that, Metricom recently stated in a document filed with the Securities and Exchange Commission that it will run out of cash by August unless it finds new investors. What else can go wrong?
"We believe there's a large chance the company will go bankrupt," says Thomas Watts, an analyst at Merrill Lynch, who decided to stop covering Metricom in April. As harsh as it may sound, Mr. Watts is not alone. "Given the company's financial requirements, it's unlikely that it will be able to sustain its current capital structure," says an investment banker familiar with Metricom's woes.
At the end of the company's March quarter, Metricom had $270.1 million in cash left on its balance sheet. In the same quarter, the firm posted net losses of $186 million. The investment banker says that the high costs associated with building and maintaining its network -- the firm needs to raise at least $500 million in new cash to remain afloat -- combined with the high operational expenses "probably won't allow Metricom to live as a stand-alone company in the future."
BLUNDERS APLENTY
In hindsight, Metricom's history is littered with business blunders. The firm's original plan was to become a wholesale provider of wireless services focused on maintaining and increasing the capacity of its network. It would then rely mainly on retailers like WorldCom (which owns 34 percent of the company), Wireless WebConnect, and Juno Online Services (Nasdaq: JWEB), among others, to market the service.
The problem was that the high costs associated with acquiring clients -- combined with Metricom's delay in expanding its network -- ended up discouraging retailers from aggressively marketing the product. Metricom's original plan was to deploy the service in 46 cities around the country by summer 2001. Ricochet is currently available in just 13 metro areas.
Metricom also spent some of its own money trying to boost its subscriber base, to no avail. The company's selling, general, and administrative expenses, for example, ballooned from $19 million in 1999 to $65.1 million in 2000. According to Metricom's 10-K annual report, most of this increase came from increased marketing, advertising, and public relations expenditures.
The firm also painted itself into a corner with a proprietary technology -- microcellular data network -- that, albeit highly praised by customers, has failed to muster industrywide support. Making matters worse, competition from emerging, and, in some cases, cheaper technologies -- usually developed under the auspices of international standards -- is now threatening to turn Ricochet into the Betamax of the wireless data network world.
Take 802.11b, for example. The industry protocol for wireless local area networks is cheaper and easier to deploy than Metricom's technology, which still requires trained personnel to install radio transmitters on utility poles in areas where it wants to roll out service. The next-generation standard for high-speed 3G wireless networks -- backed by giants like Motorola (NYSE: MOT), Ericsson (Nasdaq: ERICY), and NTT DoCoMo (Tokyo: 9437) -- is another example of potential competition.
BUYER, WHERE ART THOU?
In March, Metricom -- saddled by $246 million in debt -- said it would scale back the expansion of its network and increase its financial discipline in order to lure potential investors that would provide the company with the funds it needs to stay alive. We believe it's unlikely that the firm will raise much money in the current arid market environment.
A more feasible solution would be for Metricom to sell out. That seems to be the path the company is pursuing, at least based on the compensation package granted by Metricom's board to interim CEO Ralph Derrickson, a former employee of Mr. Allen's Vulcan Ventures.
According to an SEC filing, Mr. Derrickson, who refused to be interviewed for this article, has a monthly gross salary of $150,000 and, among other things, will receive a bonus equal to 1.5 percent of the purchase price if Metricom is sold. On top of that, Mr. Derrickson also plays a consulting role, for which he is paid at a rate of $5,000 a day. "Those look like investment banking fees to me. It seems they hired someone to sell, not to run, the business," says another source familiar with the situation.
Sources say Mr. Derrickson is quietly, but actively, shopping Metricom around to potential buyers, including BellSouth Mobile Data and Compaq Computer (NYSE: CPQ), which already sells Ricochet cards in one line of laptops. Will any white knight step up? Don't bet on it. |
