Hancock Resigns, Is Exodus Sale Next?

Industry analysts believe the long-rumored resignation of Exodus Communications CEO Ellen Hancock could be the final straw before the company goes up for sale.

Industry analysts believe the long-rumored resignation of Exodus Communications CEO Ellen Hancock could be the final straw before the company goes up for sale.

Exodus announced Hancocks resignation Sep. 4. William Krause, ex-chairman of 3Com and a member of Exodus board of directors, is now at the companys helm. Exodus spokespeople were not immediately available for comment. The news is not a big surprise for industry onlookers and customers.

"High level, I think it was expected and hoped for," said Andrew Schoepfer, president of Tier 1 Research. It means that they either have the financing really close, "or sale of the company really close, and Id say it is more likely the first rather than the second."

Schoepfer believes Exodus will try to sell and lease back some of the equipment it uses inside its data centers to raise some cash. Exodus is looking to raise about $500 million to ensure it has enough cash to take it into profitability in 2003.

Changes in management, however, suggest that Exodus could be seeking an acquisition deal more aggressively. Hancocks departure follows the resignation of three board members, which could be a signal, Schoepfer observes, that a "go it alone" party led by Hancock has been defeated by a "sell it" party.

It is less clear whod want to buy Exodus. The rumor mill suggests that Global Crossing, Exodus largest shareholder, was looking into purchasing it, but was advised against the move. Financial analysts like U.S. Bancorp Piper Jaffrays Cary Robinson say Global Crossing is the only reasonable acquisition candidate since Exodus buys over 50 percent of its bandwidth from Global Crossing, a contract that any other telecom bidder would have to buy out. But Exodus might be looking for buyers outside of the telecom world, talking to traditional systems integrators like Accenture, Robinson said.

Hancocks departure comes at tough time for the high-end Web hosting company.

"Its not good news, this continues the exodus of employees, board members, management, -- its all an indication there are significant debates going on at the board level over the future of the company," said Robinson.

Hancock may have been forced to resign because she failed to raise the $300 million to $500 million Exodus needs to reach profitability; or because sales to enterprise customers are grossly overestimated, Robinson reasoned. If Exodus is on track with rising enterprise sales, and dot com churn is contained, why sell the company for nothing with its shares trading at $1, Robinson asks.

The resulting confusion about whats going on with the company is not helping Exodus fight its 12 percent customer churn, bad debt from bankrupt clients and decreasing IT spending which is affecting the volume of new customer business. While most existing customers are believed to be staying put, those who had problems with Exodus before are intensifying their search for alternative service providers. To many, Hancocks personal involvement in customers affairs has been a reliable gauge of Exodus viability as a going concern.

Adam Rothschild, the lead network architect for a NYC-based web development firm, and an Exodus customer, says that early on Hancock would personally reply to e-mails that were service-related. Her personal attention started to wane a couple of years ago, and worse, e-mails were forwarded to assistants who simply ignored them.

Next, Rothschild says, Hancock defended Exodus position on keeping artificially high colocation and bandwidth prices within its data centers that caused churn to competitors such Level 3 and Metromedia Fibers AboveNet.

And finally, Exoduss bread and butter offering – colocation – started slipping. Rothschild says he lived through four distinct power outages in different Exodus facilities over the last two years, and has intensified his search for alternative service providers given Exoduss current conditions.

"Hancocks resignation is a sign of failure, bit it didnt take me by surprise," he said. "In essence Exodus is either a sinking ship or an acquisition target."