FASTNET Acquires Netaxs

FASTNET, a regional ISP specializing in medium-sized corporate customers, acquired Netaxs, a backbone provider and ISP. The merger of two companies near Philadelphia, Pa. is intended to build a super-regional ISP and "the first profitable Internet business of its size."

by Alex Goldman ISP-Planet Associate Editor [April 5, 2002]

Bethlehem, Pa.-based FASTNET (NASDAQ: FSST) announced today that it has acquired privately held Conshaucken, Pa.-based Netaxs/Earthstation. Netaxs' ISP clients include New York City-based Panix. Terms of the deal were not announced. The companies expect to find cost savings as well as additional revenue opportunities in the merger.

Netaxs combines a local ISP business—even dialup, in which it has carved out a specialty niche by supporting UNIX and Macintosh OS users—with an East Coast backbone (see network map) built around a collocation center in Philadelphia, Pa.

Netaxs' CTO Avi Freedman and its CEO Jeff Pasquale will stay with the merged entity. Although their exact titles were not yet announced, it is clear that Avi Freedman will provide technical expertise and Jeff Pasquale will get back into the business of acquiring customers. Said Stephan A. Hurly, President and CEO of FASTNET, "Jeff is a great guy. He built up Earthstation into an enterprise that Avi felt was good enough to merge with. Jeff is a real entrepreneur and is very good at landing new business."

FASTNET does not have a backbone. It has data centers (which it calls regional Customer Network Facilities) in the following ten locations: Wilkes-Barre, Bethleham, Harrisburg, and Philadalphia in Pennsylvania; Pennsaucken, Princeton, Basking Ridge, and Jersey City in New Jersey; New York City; and Washington, D.C.

In its last 10-K, submitted to the SEC on April 1, 2002, FASTNET claimed approximately $12 million in cash and cash equivalents as of December 30, 2001 and noted that its biggest business challenge was to distinguish itself from its competitors. The company had lost Microsoft WebTV Networks account on Septermber 30, 2001, which had provided 8 percent, 20 percent, and 21 percent of total revenues for the years ended December 31, 2001, 2000, and 1999, respectively.

At the end of 2000 and during 2001, FASTNET terminated 44 employees, bringing FASTNET's total empoyment down to 106 full-time employees and two part timers. Netaxs has approximately 60 employees.

Merging FASTNET's corporate customers (FASTNET defines its core business as serving enterprises with over 100 employees) and customer service-oriented business with Netaxs' backbone and focus on technology should create many synergies. The companies are not far from each other in Pennsylvania, so most employees should find both offices easy to get to, and the only areas of data center duplication will be in Philadelphia, New York, and Washington, D.C.

You can see the difference between the two companies in their allocation of resources. Of Netaxs' 60 employees, about half are technical, one-quarter are sales, and the remaining quarter are everything else from administration and human resources to management. Of FASTNET's 108 employees, 22 are engineers, 10 are in the Network Operations Center (NOC), 30 are involved in customer care and in managing customers' networks, another 30 handle administration and management, and the remaining 14 handle sales and marketing.

Hurley said,"I come from a banking background. When I came in as CEO of FASTNET over a year ago, I did a profit and loss accounting of every expense. I found that our Microsoft WebTV account brought in a lot of revenue but was not profitable." He also cut employees, especially in marketing, but made sure that customer care was not affected.

Hurly noted, as if it were a cardinal rule of the ISP business, "At the end of the day there is no better care than highly trained employees answering the phone."

Hurly also cut costs by improving network management systems so that fewer technical employees were required to monitor the network.

Finally, he started getting out of telco contracts. Most of his telco leases have already expired or expire this year. When asked whether he knew he was going to buy Netaxs last year, he demurred, but did say that any ISP still paying according to a contract negotiated at the height of the boom could probably get a better deal now. Hurly was so certain that he could do better that he even bought out of some contracts. Now that he owns his own backbone, that seems visionary.

Hurly expects few, if any, layoffs to result from the merger. "We're still a growing company and in Netaxs, we purchased a company that will improve our financial performance. We're not following the Verio model, which acquired scale in revenues. We are focused on cash flow. We do still see opportunities, and it is a buyer's market. We're not announcing the terms of the deal, but in general we do equity-based deals, and it's a tremendous vindication of our business that people who spent a decade building their business will merge with us for equity."

In January, 2002, FASTNET purchased SuperLink Internet Services of East Brunswick, New Jersey

In conclusion, Hurly was optimistic about the future. "There will always be room for super-regional providers. We believe that we will be the first profitable Internet enterprise to hit the $50 million revenue mark. While the massive ISPs of the world are focused on their billion dollar accounts, we can do very well working the multi-million dollar accounts that they ignore."

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