This piece of news is interesting (WCOM owns 15% of Verio):
Verio Gets Attention On-Line As Wall Street Sees Takeover
May 22, 1998 5:18 PM
By Carrie Lee
The Wall Street Journal Interactive Edition
NEW YORK (Dow Jones)--On-line investors are
chewing over the prospects for Verio, an Internet access
provider that went public last week. If the analysts'
community has it right, the company's run in the public
market may be a short one.
Some on Wall Street are convinced Englewood, Colo.,
Verio, which is buying up small Internet-access
companies and stringing them together into a nationwide
provider, may become a takeover target itself.
Aided by investors' enthusiasm for all things
Internet-related, Verio got off to a strong start with its
initial public offering. Its shares were offered to the
public at 23, and they climbed as high as 30 during their
first trading day. The stock slipped back to 23 early this
week, but it closed at 24 3/8, down 7/8, in Nasdaq
Stock Market trading on Friday.
Verio's IPO caught the attention of people participating
in on-line message boards.
"I think this stock is going to have ups and downs for a
few months, but future growth and potential is there for
those that get in early," wrote one person, in a posting in
an America Online forum last week.
But analysts say that raising money from a stock offering
is only half of the story for Verio. "Short term [the goal
is] to raise money to get bigger, and then become a
more attractive target" says Ken Fleming, an analyst at
Renaissance Capital Corp., a Greenwich, Conn,
research firm.
Ryan Jacob, portfolio manager of Internet Fund in New
York, says a sale of Verio is "a very strong possibility."
Verio could be attractive to companies, such as Qwest
Communications, that have built national fiber-optics
networks and are eager for services that can make use
of t hat communications capacity.
Neither Fleming and Jacob, nor Renaissance Capital
and Internet Fund have an interest in Verio stock, they
said. Justin Jaschke, Verio's chief executive officer, said
he doesn't rule out an eventual sale of the company, but
added that for now the company wants to stay
independent.
"The reality is that in a consolidating industry [a merger
is] always a possibility. But we're building this company
as though we will continue to operate it for the next 100
years,"Jaschke said.
For its part, Qwest, based in Denver, declines to
comment, saying that as a matter of policy it doesn't
comment on speculation about merger activity. Verio
has agreed to lease usage on Qwest's fiber-optic
network. It will pay $100 million over seven years for
access to the network.
Verio Customer Base May Attract Big Cos
But some analysts believe big network companies may
come to favor the outright purchase of Internet service
providers like Verio, rather than simply viewing them as
customers. Verio's base of 80,000 customers in 33 of
the top 50 metropolitan areas of the U.S. could be
attractive to the network companies.
"Sometimes it makes more sense to buy your customers
than to slug it out in the market," Jacob says. "Any
company that is out there building a network and has not
started yet to market to customers, and doesn't have the
branded recognition, will look to acquisitions as a way
to build the business."
As for the IPO, Jaschke says Verio needs the cash to
fund its efforts to make acquisitions. "Public stock
provides a liquid way of acquiring properties, and
flexibility for future acquisitions and raising more capital,"
he said. In the past, Verio, which began operations in
1996, often has taken on debt to make purchases. It has
acquired 35 regional access providers.
At the end of 1997, Verio had total long-term debt of
$142.3 million. For last year, it reported a loss of $46.3
million, while its revenues for the period climbed to
$35.7 million from $2.4 million in 1996. Verio has never
posted a profit, and Jaschke wouldn't comment on when
he expects the company to achieve profitability.
Verio expects to make money with a concept commonly
referred to as a roll-up, in which a company makes
acquisitions in a fragmented business to achieve
economies of scale.
"We think this is a business that lends itself to the
economies of scale, something akin to the cable or local
players controlling 80% of the market share," Jaschke
said.
But Verio is facing a host of other players. Earlier this
year, RCN Corp. (RCNC), a fiber-optic network firm,
acquired Internet service provider Erols Internet Inc.
Also, Sprint Corp. (FON) recently bought a 30% stake
in E arthLink Network Inc. (ELNK), and IXC
Communications Inc. (IIXC), a telecommunications
company, purchased a 20% stake in PSINet Inc.
(PSIX).
Other Internet service providers have been acquired by
telecommunications behemoths, such as WorldCom Inc.
(WCOM), as they try to provide "one-stop shopping"
for Internet and telephone services. On-line companies,
such as Lycos Inc. (LCOS), also have entered the field,
and major cable companies are looking into it.
WorldCom owns about 15% of Verio. Nippon
Telegraph and Telephone Corp. (NTT) owns 12%, and
Verio board members and employees own 16%.
Verio concentrates on Internet service providers that
serve small- and mid-size businesses, rather than
companies that market access to consumers. The
company makes money through service fees, and higher
margin services such as Web site management and
maintenance. Other companies, like PSINet and
Concentric Network Corp. (CNCX) are pursuing the
same small- and mid-size business markets, but these
two companies have built their own infrastructures
instead of leasing the rights to them like Verio does.
There are about 5,000 Internet service providers in the
U.S., according to International Data Corp., a
Framingham, Mass., research firm. In 1997, the
research firm calculates that Internet service providers
collected $1.15 billion in total revenues from small- and
medium-size businesses. That figure is expected to
increase to $4.82 billion in 2000.
-By Carrie Lee |
