Washington, D.C.-area Internet service providers (ISP)
had a pretty busy day yesterday in the realm of mergers &
acquisitions. Corporate ISP and backbone provider PSINet
(Nasdaq: PSIX) received a surprise $10 per share cash
offer from the former CEO of Digex. Meanwhile, privately
held Erols, a primarily consumer-oriented ISP operating
from Washington to Massachusetts, agreed to be acquired
by competitive local exchange carrier (CLEC) RCN Corp.
(Nasdaq: RCNC) for $83.5 million in cash and stock. The
tales of the two companies couldn't be more different from
the viewpoint of shareholders, though.
Shareholders in PSINet have gotten a big fat nothing for
their investment. Since coming public in 1995, PSINet has
generated a negative annual return to shareholders of 32%
per year. That's not to say that PSINet hasn't done a good
job in transforming itself from a consumer dial-up service to
a heavier-duty corporate services company. PSINet also
announced yesterday that its per-customer contract values
are going up, which is central to the company's strategy.
Has this paid off for shareholders? Nope. And if a vote goes
through tomorrow that gives CLEC IXC Communications
(Nasdaq: IIXC) 20% of PSINet, shareholders had better hope the company turns around
this trend of negative shareholder return if they want to hold onto their company. In
exchange for 10,000 route miles of OC-48 fiber, PSINet is trading 20% of its shares.
According to the most recent 10-Q, if IXC's stake in PSINet doesn't reach $240 million in
value within a year of completing delivery of this fiber, PSINet will have to make up the
difference between that target and the market value of the stock by either issuing more
equity or coming up with cash.
Boardwatch magazine, an ISP trade journal, recently said that IXC can deliver that fiber
within three years. So PSINet will have to grow shareholder value by 42% per year over
the next four years if shareholders don't want to be diluted by this deal. For instance, if
PSI only grows shareholder value at 20% per year over the next four years, shareholders
will have to give up another 20% of PSI's equity to IXC. Some shareholders would say
right now, "Take the cash from the group led by the Digex CEO." Based on other mergers
and acquisitions in the industry, the current offer of 1.7 times estimated 1998 revenues is
fair. |
