PSINet rejects $400 million offer
PSINet's board rejects U.S. Internetworking's unsolicited $400 million bid for the Internet service provider, setting the stage for a possible hostile takeover.
PSINet has a special meeting scheduled for tomorrow to approve its pending transaction with digital network supplier IXC Internet Services. PSINet plans to give 20 percent of its equity to IXC Communications, parent of IXC Internet, in exchange for additional bandwidth. The transaction previously was announced in July, and is expected to close -- following shareholder approval--in early March.
That expectation does not mean, however, that a competing offer is out of the question. Chris McCleary said that he and his company had a meeting scheduled at 10:30 a.m. PT to discuss its next move. He said that, following the meeting, he would attempt to set up a meeting with PSINet to discuss alternative plans.
PSINet said its board of directors met last night and decided that the opportunity proposed by U.S. Internetworking was not of interest to PSINet. U.S. Internetworking faxed its unsolicited offer to PSINet yesterday and asked the ISP to postpone its shareholders meeting for a minimum of 120 days. U.S. Internetworking wanted to conduct a thorough review of the PSINet's finances during that time, and also wanted time to complete its own financing during.
Under U.S. Internetworking's cash tender offer, the holding company proposed acquiring a minimum of 51 percent of PSINet's outstanding shares for $10 a share.
"This is a sad day for shareholders," said McCleary. "We requested that they allow us to present directly to shareholders.... We asked them to meet with us and defer their meeting tomorrow. By not considering our offer, they force the shareholders to make a decision based on one option," he said, referring to PSINet's pending deal with IXC Internet.
PSINet, however, said that U.S. Internetworking's proposal was inconsistent with PSINet's business plan, and that the IXC deal was more in line with it. The ISP also noted that the proposal would have required PSINet to breach its agreement with IXC--a move the board had determined was not in the best interests of the company nor of its shareholders, PSINet said.
"We were not sure if the deal would come through, and we would be in breach of contract with IXC," said Ed Postal, PSINet's chief financial officer. "The deal with IXC is the greatest deal the company has ever done."
U.S. Internetworking's offer asked PSINet to delay the special shareholder meeting on Friday to enable it to present directly to the shareholders a tender offer to purchase a minimum of 51 percent and maximum of 100 percent of outstanding shares of PSINet at a premium of its recent trading level.
As news spread of U.S. Internetworking's offer yesterday, PSINet's stock soared 30 percent to close at 8-7/16, up from 6-1/2 the previous day. Today the stock fell back a notch to 7-3/4.
Given McCleary's desire to take his offer "directly" to the shareholders for approval rather first getting the board's blessing, and given the board's rejection of his offer today, a hostile takeover attempt could loom on the horizon.
McCleary was president and CEO of Digex, another national commercial ISP, until very recently. Digex was acquired by Tampa-based Intermedia Communications in July, and McCleary's departure was part of Intermedia's reorganization.
Some analysts say that the latest offer increases the potential for more PSINet suitors to emerge.
But David Takata, an analyst at Gruntal & Company, said yesterday that the ISP has been shopped around by Merrill Lynch for over a year, and that many potential buyers already have reviewed PSINet's financial books.
Postal said PSINet's hiring of Merrill Lynch was a response to surrounding market pressures, when UUNet was sold to MFS Communications and then in turn to WorldCom. "We considered shareholder value, and there was a lot of quick consolidation then. We wanted to uncover any opportunities."
Takata said he has set a price target of $15 a share for PSINet, making U.S. Internetworking's offer weak compared to the company's potential.
"A deal [with U.S. Internetworking or another suitor] is inevitable in the next couple of days, unless IXC sweetens its deal," said Takata, adding that it is unlikely IXC will up its bid.
He explained that IXC does not need to increase its offer because PSINet will still need a backbone. Consequently, even if U.S. Internetworking buys the company, the former PSINet likely would still need to do business with IXC, if not with some other backbone provider.
Should the IXC-PSINet deal go through, however, any long-distance telcos that had been interested in the ISP likely no longer would be, because such companies already have a backbone, Takata said.
"[U.S. Internetworking's offer] validates the strategic importance of companies like PSINet, Digex, and AGIS (Apex Global Information Systems). PSINet is one of the last big tier-one backbone Internet providers," he added, noting that the company is in a unique position to move a lot of traffic, and as a result is a logical choice for big companies coming online.
"This makes their strategic value go up," Takata said.