The deal will strongly reinforce the Herndon, Virginia-based ISP's links between its core U.S., European, and Asian markets, and will give it a foothold in a handful of new countries where Internet use is growing rapidly.
The announcement is the latest piece in a PSINet buying spree, sparked by an offering of more than $300 million in debt last year. The company has snapped up ISPs and bandwidth across the globe, hoping to boost itself into the ranks of top-tier carriers such as MCI WorldCom and international consortiums like GlobalOne.
But while analysts say the company is taking steps in the right direction, some say it has yet to prove it can play on the same field as the major international telecommunications companies.
"These acquisitions have given the ISP an invitation to the party," said Yankee Group analyst Matthew Kovar. "This doesn't mean that they'll be able to get the dance and close the deals they need."
The Flag, or Fiber Optic Link around the Globe, cable began carrying data after four years of development in late 1997. The network links Japan and the United Kingdom with stops in 11 countries across southern Europe and Asia.
By buying in on the high-speed network, PSINet completes its fiber reach around the globe. The purchase also gives the company the opportunity to expand its services into some of these new markets.
The company already owns cable linking the United States and Japan, and has stepped up its acquisition efforts in Asia in recent months. Since last fall, it has purchased ISPs in Korea, Hong Kong, and Japan.
The Flag network will allow the company to expand into China and other quickly growing markets in the region, company executives said.
"The new Flag bandwidth reinforces this [expansion] strategy, allowing PSINet to easily expand within Asia Pacific region?and pursue further growth by acquisition of other companies in international markets connected by the Flag cable," said William Schrader, CEO of PSINet, in a statement.
The move met with approval with some analysts, who say PSINet is making the right moves to compete with larger backbone ISPs, such as MCI WorldCom's UUNet and the other consortiums of companies offering international data transport.
BancBoston Robertson Stephens analyst Rick Juarez said today he raised his estimates for PSINet's earnings for 1998, 1999, and 2000, and reiterated his "buy" rating on the stock.
"We are revising our revenue estimates to reflect PSI's 18 acquisitions in the past 12 months and continued growth," Juarez said. "We believe PSI's shares are undervalued, given its growth and global IP delivery capabilities."
But the company still has a long way to go before it can compete with the likes of AT&T or Global One, the joint venture between Sprint, France Telecom, and Deutsche Telekom, Kovar said. These companies can offer businesses broad packages of voice, data, and other telecommunications services--an offering which PSINet has yet to provide.
"PSINet has done a very good job in small-to-medium businesses and among early adopters in the U.S.," Kovar added. "But it still hasn't been an international player on that scale."