Hard Times

PSINets transaction solutions and large pieces of Metamor are on the block, the first manifestation of the beleaguered companys strategy to raise cash by selling assets and repair its relationship with Wall Street through fiscal responsibility.

The Chantilly, Va., company fell out of favor with investors after issuing a revenue shortfall alert last year, which prompted its president, Pete Wills, to resign and the company to write off almost $1 billion in losses over the controversial acquisition of Metamor, a consulting and transaction shop. As a result, the bottom fell out of PSINets stock, and its shares plunged to less than $1. The stock started a painful climb last week, partially as a result of The Goldman Sachs Groups road show to sell some key PSINet assets.

"They said [in October] they are going to sell off their ISP [Internet service provider] business, but everyone knows they have been shopping Metamor, TNS [Transactions Solutions] and the Xpedior part of Metamor — whatever these guys can get their hands on, they are pretty desperate for money," said a source familiar with the situation.

Goldman Sachs, the investment bank hired to shop the assets, wasnt able to comment by deadline. PSINet neither confirmed nor denied speculation.

"I have not heard that we have any deals on the table," said Doug Baj, a PSINet spokesman.

The access industrys rumor mill, however, is cranked to maximum. Sprint has been mentioned as a possible takeover candidate and there are whispers that PSINet has tried unsuccessfully to sell $350 million in bonds. There is also talk of PSINet laying off half of its Metamor sales force — a possible precursor to a sale.

Debt Sale Dubious

Times couldnt be worse for struggling telecommunications companies.

The bond market is dead. Genuity, which enjoyed one of the most successful data carrier initial public offerings ever, pulled its bond offering early last week, citing a sudden need to "to complete its assessment of the current slowdown in economic activity and information technology spending and recent new order activity." If Genuity, backed by Verizon Communications, cant sell its investment-grade paper on the street, there is little chance PSINet would ever be able to sell its debt, financial analysts said.

"Its a triple-B-rated bond, and they have Verizon standing behind them, and it is pretty bad when a big company like Verizon cant issue debt. That shows you how uptight this market is," said David Takata, an analyst at Gerard Klauer Mattison.

There isnt much left for PSINet to do but to start selling its children.

"These guys will run out of cash at the end of Q2. Its either sell [units] or file [for bankruptcy]," said a stock analyst familiar with the situation.

PSINet is expected to issue new financial guidance about its health when it reports quarterly results on Feb. 20. And while the financial community, alienated by the companys management, tends to paint PSINet in dark colors, the company remains optimistic about its future.

Chief Executive Bill Schrader has said repeatedly that PSINet will survive and stay in the running as a leading access provider.

On that count, there is some catching up to do. International Data Corp. recently evaluated the strength of the 11 largest data carriers based on their successes in selling e-services to business customers. The good news is that PSINet still made the cut. The bad news is that it is last in the pack and faces increasing competition as other companies crack the code of selling data-related services.

WorldCom, which long ago bought PSINets archrival UUnet, now sits atop the e-services universe, at least in the eyes of IDC analysts. It not only runs the worlds largest backbone, but it recently received the Federal Communications Commissions approval to purchase managed hosting provider Digex. Eighty percent of WorldComs business is now data, company officials said.

WorldCom officials said the company isnt likely to make any other big purchases any time soon.

"I think it would be very difficult for WorldCom to do large acquisitions in the future as it was proven out with the Sprint merger," Ronald Beaumont, WorldComs chief operating officer, told reporters at a Generation D services presentation in Ashburn, Va. last week. "So its going to be smaller acquisitions."

With its redundant network, most onlookers said PSINet is not likely to be among them.