Exodus jumps on reorg bandwagon

Sacrificing profitability for market share. Overexpanding in advance of demand. Not anticipating the demise of the dotcoms. The sins that led Exodus Communications to the top of the Web-hosting world also led it into bankruptcy.

The result is a company with more than $4 billion in liabilities and the task of reorganizing its capital structure. It must reach agreements to restructure payments to bondholders, exchange debt for equity and cut costs, as well as reduce headcount further and sell off noncore and superfluous assets. And it has to do it all on $200 million in debtor-in-possession financing from GE Capital and the little cash remaining on its books.

It won't be easy, but given the company's large market share and assets, Exodus' attempt to reorganize its capital structure just might work, say analysts.

For example, Exodus' 4500 customers in 44 data centers — many of them marquee names like Yahoo, Microsoft and Merrill Lynch — will have trouble jumping ship. Under Chapter 11 bankruptcy laws, leaving Exodus is no simple task.

Because the laws are written to help the bankrupt company reorganize, customer contracts are considered assets, said Stephanie Wickouski, a bankruptcy lawyer and partner with Arent Fox Kintner Plotkin & Kahn. If the contract is exclusive and the customers continue to receive service, they generally are considered bound to the bankrupt company.

Even if they aren't tied contractually, most customers will wait until the last possible moment because the process of changing providers is a huge headache, said Courtney Quinn, senior analyst for The Yankee Group. “A lot of [Exodus] customers are hoping they're not going to have to go through that,” Quinn said. “We're seeing a lot of fingers crossed.”

For now, the company's operations seem to be running smoothly, said Lydia Leong, principal consultant for Gartner Dataquest. “We have heard no reports that Exodus customer service is suffering,” she said.

According to John Kane, CEO of Telseon, an Exodus customer, supplier and reseller partner, the bankruptcy filing is “an event organized around the debt structure,” and the company continues to pay its bills. Kane said he would be surprised if Exodus doesn't exit Chapter 11 successfully by the middle of next year. “They are hosting a third of the world's content on the Internet; they're not going to go away,” he said.

In addition to restructuring Exodus' capital commitments, leadership also must tack operational issues, said Melanie Posey, analyst for IDC. “They need to cut out all the bloat. I guess that would mean shuttering some of the data centers and consolidating customers.”

If Exodus fails to emerge from bankruptcy, Web hosters and managed services providers that have fed off its financial troubles so far could be in for a banquet. Independent Web hosters such as NaviSite, Data Return and Equinix are also in financial trouble, but they are unlikely to benefit from a mass customer migration, Quinn said.

The biggest beneficiaries would be the big telcos pushing into managed services. “Network providers can make better use of these assets by combining them with bandwidth connectivity,” said Precursor Group analyst Bill Whyman in a research report.

But don't expect any of the telcos to belly up to the bar and plunk down cash for Exodus or its physical plant, Quinn said. The company's assets are primarily real estate, buildings and an enterprise customer base that the company has had difficulty migrating from co-location services to managed services. As Exodus found out too late, Fortune 500 companies with robust IT departments want to manage their own servers, Quinn said, and they are unwilling to make a 180-degree shift to managed hosting and services.

More important, most large telcos have more than enough data center capacity to meet demand. “They are doing their damndest just to fill what they have,” Quinn said.