Exodus Communications bankruptcy filing marks the end of exuberance in the last high-growth segment of the Internet era. And if Sprint ends up the new owner of the former Wall Street darling, the deal will also signal the end of the dream of Web hosters as an independent industry.
On Wednesday, Sept. 26, Exodus filed for Chapter 11 reorganization and secured $200 million in debtor-in-possession financing from GE Capital. Rumors of pending bankruptcy leaked out on Tuesday, Sept. 25, sending the companys stock into a 55 percent plunge before trading on the Nasdaq was halted.
Andrew Schroepfer, the analyst who caused the furor by calling the big announcement a day early, predicted that after entering into Chapter 11 reorganization, Exodus would fire 1,000 people, close 10 to 15 data centers, use debtor-in-possession financing to pay 25 cents on the dollar to bondholders and likely be acquired, perhaps by Sprint.
Exodus confirmed it will lay people off as a result of the bankruptcy, but would not specify the number. A spokeswoman did confirm that 10 nonoperational data centers will close. She was more vague on whether bondholders will get their due. "This financing, as well as cash from operations, will be used to fund post-petition operating expenses and supplier and employee obligations," she said.
She also said Exodus believes its bankruptcy restructuring would allow it to continue operating as an independent company.
Some analysts tracking the Web hoster said that if there were a buyer for Exodus, the deal would have been done by now.
"There is not a single telecom right now that has the money," said Cary Robinson, U.S. Bancorp Piper Jaffrays senior research analyst for communication services.
Schroepfer, president of Tier 1 Research, said that once Exodus sheds its debt, the company will be an attractive asset, and its management may be more amenable to acquisition once details of a deal are on the table. "I believe Sprint is the most interested party, and EDS [Electronic Data Systems] is the party that should be the most interested," he said.
Global Crossing is the telephone company with the most financial interest in Exodus. The carrier is a 20 percent shareholder, and holds a contract to supply at least 50 percent of bandwidth to Exodus outside Asia. Global Crossing issued a statement calling the loss of revenue from Exodus immaterial, and said that it plans to continue reselling Exodus Web hosting to its customers. Global Crossing did point out it could use third parties or internal capabilities if Exodus were unable to provide such services.
Exodus CEO William Krause, who replaced long-time leader Ellen Hancock this month, said bankruptcy restructuring would help the company focus on long-term growth. The company acknowledged in the bankruptcy filing that its reliance on the growth of the Internet was the main reason for its downfall.
"They had so much debt, they were planning on a significant growth in the Internet demand, and when that ended, so did their company," Robinson said.
Exodus failure is a picture of debt burden gone unbearable; other hosters are already saying that it is a model for how not to do business.
Conxion has no debt and plans to do $1 billion in revenue in the near future with enterprise customers such as Microsoft and Oracle, Conxion CEO Antonio Salerno told Interactive Week a month ago.
"Our debt-free business model is designed for growth and longevity. Some competitors commented we were underleveraging our growth, but those companies are in Chapter 11," Salerno said.