Exodus Hires Advisors as Firm Seeks
To Drum Up Non-Dot-Com Customers
By MYLENE MANGALINDAN
Staff Reporter of THE WALL STREET JOURNAL
Exodus Communications Inc.'s summer has been no vacation.
The Santa Clara, Calif., company, which
operates facilities to house and manage Web
servers, had to expand rapidly to meet demand
during the Internet's heady days. Now, with
many dot-coms dead and other companies
curbing their technology spending, Exodus has
a shrinking number of potential customers, a
mountain of debt and a cash hoard that is
rapidly dwindling.
To help explore options, Exodus hired Goldman Sachs & Co., Credit
Suisse First Boston and Lazard Freres as financial advisers, according to
people familiar with the situation. The company had said in July that it hired
advisers, but hadn't disclosed their names. The companies are assisting
Exodus in soliciting potential buyers and prospective financers, as well as
considering other possibilities. Though several companies have expressed
interest, no serious suitors or offers have materialized, these people say.
In the meantime, Exodus has been trying to
drum up more business from established
corporations, reducing its dependence on
dot-coms and keeping existing customers from
bolting out of concern for the company's viability. A few customers say
privately that they are going as far as making contingency plans and
seeking alternatives should the company fold. They include International
Business Machines Corp., Globix Corp. and Qwest Communications
International Inc.
The situation raises the pressure on Ellen Hancock, the silver-haired former
IBM executive who is Exodus's chief executive. While acknowledging that
the company would consider serious acquisition offers, she says it hasn't
lost a single customer because of its financial worries and is executing a
plan to boost revenue. "We're getting good solid business," Ms. Hancock
says.
The company did lose three of its 10 directors, however. Last week,
Exodus cited "personal reasons" it didn't specify for the resignations of
venture capitalists Mark Dubovoy, managing partner, Leapfrog Ventures;
Thadeus J. Mocarski, managing director, Navis Partners LLC; and Naomi
Seligman, senior partner, Cassius Advisors.
Though some people close to the
company discount rumors of power
struggles, the departures reinforce
the perception that the three
directors saw more productive uses
for their time. Mr. Dubovoy and Ms.
Seligman couldn't be reached for
comment. Mr. Mocarski said he left
to devote more attention to
companies in his company's current
fund.
Those moves follow the departure of
three Exodus executives earlier this
year. In May, the company said Chief Financial Officer R. Marshall Case,
President and Chief Operating Officer Don Casey and Executive Vice
President and head of marketing Beverly Brown had left the company.
Investors and analysts haven't been optimistic about Exodus's situation.
During the past year, as it twice fell short of Wall Street forecasts for its
quarterly results, its shares have fallen 98% from a 52-week high of $69.
In 4 p.m. Nasdaq Stock Market trading Friday, Exodus was at $1.07,
down 11 cents, or 9%.
While plunging stock prices aren't unique in the current environment,
Exodus is part of a minority of Internet start-ups that has real assets -- a lot
of them. The company operates multiple data centers and high-capacity
network connections to ensure that Web sites stay up and running. As the
Internet boom took off, Exodus expanded by making nine acquisitions in
three years, including rival GlobalCenter Holding Co., then a unit of Global
Crossing Ltd.
But Exodus borrowed heavily to fund the aggressive expansion. As of June
30, its borrowings totaled about $3.5 billion. It had about $600 million in
cash at that time, but it is drawing down quickly on that total despite layoffs
and plans to delay spending on some new data centers, according to
company statements. It has projected that it will end the year with $200
million.
There are other financial options besides selling the company. Exodus has
been busy trying to raise money through selling some of its facilities and
leasing them back. Other possibilities include subleasing some of its
property, such as empty lots, and taking out additional loans. The company
has said it is seeking $400 million to $500 million as a financial cushion.
William Austin, who joined Exodus last month as chief financial officer
from Houston-based BMC Software Inc., insists that Exodus has a viable
business that isn't going away. "This is eminently fixable," he says.
Exodus derives 67% of its revenue from more stable corporate, or
"enterprise," customers. Besides simply operating customers' computers
and Web sites, the company offers customers more sophisticated managed
services that account for 31% of revenue.
Every Saturday, Ms. Hancock says, she looks at the numbers of
customers it is adding and losing -- a figure known in the industry as churn.
She says she is pleased by the changing composition of the customer list
and believes the churn peaked in March.
The company is taking steps to tighten up its processes, such as identifying
its top customers and re-examining its cost structure for an environment of
slower technology spending. "We are executing against the plan," Ms.
Hancock says.
Write to Mylene Mangalindan at mylene.mangalindan@wsj.com |
