EarthLink buys New Edge Networks

Two survivors of the 1990s telecom meltdown are joining forces.

EarthLink today announced it is acquiring New Edge Networks, the Vancouver, Wash., based CLEC known for its small to mid-sized enterprise (SME) data services. EarthLink will pay approximately $144 million for New Edge, to include 2.6 million shares of EarthLink common stock and $114.3 million in cash, which includes payment of some New Edge liabilities.

The deal is expected to close in the first quarter of 2006.

The move is part of EarthLink’s plan to become “a total communications company,” said president and CEO Garry Betty. “We will provide voice, data, wired and wireless services. We plan to provide auxiliary services as well including safety and security, Web hosting and technical support for consumers.”

“EarthLink had to do something,” said Brian Washburn, analyst with Current Analysis. “They have been holding steadier and better than an AOL or MSN, but the dial-up market is rapidly going way. EarthLink has to do something to evolve beyond being a dial-up provider that resells braodband for residential customers and tries to survive on those thin margins. This was a move they could make.”

Along those lines, EarthLink has launched multiple major initiatives in recent months. It joined with SK Telecom of Korea to launch Helio, a data-centric wireless MVNO, following announcement of its voice-over-IP offering, made in September. Part of the strategy is to offer converged wireless-wireline services. In addition, EarthLink is teaming with Covad Communications (also a partner to New Edge) in offering line-powered voice services over ADSL2+ to residential customers. And it has launched a municipal WiFi business that has already landed major customers, including Philadelphia.

Acquisition of New Edge will enable EarthLink to quickly ramp up its SME presence. As one of the few DSL-based CLECs to survive the late ‘90s meltdown, New Edge has focused on providing high-value services such as virtual private network links to small businesses and building secure, efficient multi-site networks for retailers with highly distributed organizations, such as convenience stores, clothing and specialty retailers and others. The company has 56,000 business customers nationwide, but the acquisition by EarthLink gives New Edge a broader national presence for its operations.

"We felt like the network -- and by that I’m talking about Big Foot -- that New Edge has built along with all the interfaces into the carriers gives us a competitive advantage," said Bill Heys, president of EarthLink’s value and small to medium enterprises business unit. "Plus the corporate culture fit was spot on. The expertise of the mangement team was really superb. Since 1999, they funbled around trying to find the market and they have found it. That is why we picked New Edge when there were other options."

New Edge operates “Big Foot,” a national network that has a presence in 9200 central offices in the U.S., reaching into 98% of all LATAs and passing 80% of all businesses. Big Foot includes New Edge’s own network, built out in 583 COs, mostly in the Tier 2 and Tier 3 cities the company initially set out to serve. It also includes lines leased and resold from all of the former Bell companies, Covad Communications, DSLNet and MCI Communications.

EarthLink has experience delivering VoIP over VPNs, Heys said, and will be able to deliver an SMB voice product.

“One of the naturals we think for VoIP is over a business VPN--that is something we need to take advantage of immediately,” said Dan Moffat, president and CEO of New Edge.

EarthLink will bring new financial resources to New Edge, which has posted 23 consecutive quarters of revenue growth while remaining relatively unknown outside the DSL world. In announcing the deal, EarthLink said it would retain New Edge’s 345 employees and the brand itself, which will be operated as a wholly owned subsidiary.

"When we asked people the number one reason they didn't buy service from a VPN company like New Edge, they said it was because they didn't know if they were going to stay in business," Heys said. "This removes that spectre."