Chapter 11 isn't always the end
 
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Banfield Pet Hospitals had planned to rely heavily on DSL for a major network overhaul originally scheduled for completion in July. But when it became apparent that prospective service provider Rhythms NetConnections was struggling financially and possibly headed for Chapter 11 bankruptcy protection, Banfield instead chose frame relay connections from another carrier even though they cost four times as much.
"Running mission-critical applications over a network that could disappear in 30 days is not a good plan," says Lance Harris, Banfield's director of IT operations.
Harris had the foresight and good fortune not to get stuck with a vendor that wound up filing for Chapter 11 - something that the thousands of customers of bankrupt network product and service vendors now wish they could claim.
But is Chapter 11 really the end of the road for the dozens of vendors that have filed for bankruptcy protection this year?
Not exactly, although experts say few will re-emerge looking just like their old selves. Most will be acquired in whole or in parts. Their product development efforts and services won't necessarily be disrupted or discontinued, but customers could be left in limbo for an extended time and should have a solid fallback plan.
Sure, companies as varied as Continental Airlines, Macy's and Texaco have resurfaced after filing for Chapter 11 protection, but experts say it's tougher for technology companies to bounce back because their businesses tend to rely so much on momentum.
"If you're in Chapter 11, you've probably lost your momentum," says Michael Feinstein, a principal with venture capital company Atlas Venture.
The list of network industry Chapter 11 cases this year is a long one - Comdisco, Covad Communications, Exodus Communications, Metricom and Rhythms are just a few companies that have filed for protection in recent months. It has been an especially cruel year for telecom outfits, with 24 publicly traded ones filing for protection, roughly triple the number from each of the previous two years, according to BankruptcyData.com.
It's tough to draw comparisons between what struggling network companies are going through today and what famous Chapter 11 survivors like Texaco (now ChevronTexaco) experienced.
Texaco, for example, filed for Chapter 11 in 1987 to avoid paying a $10 billion court decision after the oil giant was found to have used illegal activities in trying to acquire Getty Oil. Texaco filed for Chapter 11 despite owning more than $37 billion in assets - a situation any bankrupt technology company would kill to be in.
Most bankrupt technology firms use Chapter 11 protection as a time during which to settle on their best suitor, if there are any, says Robert Keach, chairman of the Business Reorganization Committee of the American Bankruptcy Institute, a group that provides bankruptcy research and education.
In a typical Chapter 11 case, the best interests of the creditors and customers are served by having the business sold as a whole entity, rather than being chopped up and sold piecemeal, Keach says.
"With an ISP, for example, you're likely looking for a quick transaction involving the entire business," he says. "You don't want the network or the customers to go away. If you lose a few pieces, the value of the company disappears quickly."
Many of the cases involving network companies that have filed for Chapter 11 this year remain unresolved. Those that have been resolved show mixed results:
Of the companies still in Chapter 11, it appears that DSL provider Covad may emerge as an independent company.
However, Covad entered Chapter 11 with a specific plan, after agreeing to terms with holders of the majority of the company's debt, which would have creditors receive a fraction of what they were owed in cash and the remainder in stock. The deal would leave Covad with a much lighter debt load and a better chance to survive.
None of the other remaining Chapter 11 cases is as clear-cut.
Service provider Cable & Wireless has mentioned ISP PSINet as a possible takeover target.
Rumors have also linked bankrupt hosting giant Exodus, saddled with $3.5 billion in debt, to Cable & Wireless.
In a September conference call with customers, shortly after filing for Chapter 11, Exodus CEO William Krause said the company was looking to restructure - a process that would take between four and eight months. But he didn't rule out an acquisition.
"If we have somebody that wants to buy our company that is deemed by creditors and shareholders to have value, we will absolutely bring that forward," he said. "However, it's our intent to operate as an independent company, and I am confident given the assets and resources that we have that we can do that."
Fixed wireless provider Winstar is looking for investors, and officials say interested parties include other carriers, as well as private equity firms.
In a recent interview with Network World, Winstar CEO Bill Rouhana said the company would be best served to get out of Chapter 11 as quickly as possible.
"Even though we are now quite vibrant - we're actually growing - if you're a customer you have to take a deep breath to jump into the Winstar pool today," he said.
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11 roll call Here's a sampling of network companies that have filed for bankruptcy protection this year: |
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