PSINet, which has seen its stock plummet this year, said it will work with Goldman Sachs to "improve shareholder value" and is considering "a strategic alliance or the possible sale of all or a portion of PSINet."
Following the news, stock in the company gained more than 10 percent to close at $2. But PSINet shares have suffered through a yearlong slide, having traded as high as $60.94 and as low as $1.44.
The troubles for PSINet, an Ashburn, Va.-based company that touts itself as "the Internet super carrier," come even as use of the Internet is growing faster than ever. Consumer Net access and corporate data consumption are growing at explosive rates, yet PSINet, among several others, has struggled.
"I'm not at all surprised. They made it very clear on the last earnings call that they would consider their strategic options," said Drake Johnstone, vice president at Davenport & Co., a regional brokerage firm.
"They had hired a consulting firm to investigate their viability, but word on that wasn't expected until next year. It may be that things are more dire than expected," Johnstone said.
PSINet executives, cloistered in meetings all morning, according to company representatives, could not immediately be reached for comment.
Earlier this month, PSINet reported a wider third-quarter loss that failed to meet Wall Street's expectations. At the same time, the company warned that its fourth-quarter financial results would be lower and announced that a top executive had resigned. Some analysts speculate that chief executive Bill Schrader could be next to go.
The company also is facing shareholder lawsuits and has said it was hit by a slowdown in Net access and Internet consulting services, a relatively new business for PSINet, which was the result of a recent acquisition.
Wasserstein Perella Securities, in a recent equity research report, indicated that PSINet's application and Web hosting business were sluggish, owing in part to delayed data center openings. But the securities firm also indicated that PSINet's wholesale Net access business has slipped, particularly as many free ISP customers have faced their own troubles.
According to analysts, PSINet also has hired Ernst & Young to help determine, in a pending February report, whether PSINet can continue as a standalone company. Some believe CEO Schrader might depart at that time.
Davenport's Johnstone has had a rare "sell" rating on PSINet shares since mid-September. "How could it be a hold? I mean, hold until bankruptcy?" he said.
Dozens of small competitive local phone companies, broadband Internet service providers (ISPs) and communications equipment makers have been swept up by the softening stock market and ensuing shortage of investment capital. Many of these companies, all competing for the same customers, raced to gain subscribers as quickly as possible, but at high costs.
PSINet offers Net access, Web hosting, e-commerce transactions and other Internet services in 900 cities and 28 countries worldwide. Company executives believe their fiber-optic and data center hosting properties are among the company's most valuable assets.
"PSINet has built a very valuable company over the years, and we have little doubt that the company could find buyers for its assets," Wasserstein Perella analyst William Klein wrote in a research report. "We have no doubt that the bidders' list would be very long."
But some say PSINet will be lucky to sell its assets for enough money to pay off its debts, and that potential suitors, such as Qwest Communications International and other carriers, will be unwilling to pay a premium when they smell blood in the water.
"They might get enough for those assets to pay off their net debt at about $2.5 billion, but that doesn't leave much for shareholders," Johnstone said.