The Extraordinary Events That Led to the Sale of Telalink in 1999
This story was never supposed to be told publicly. We had decided that we would let “what could have been” fade into the past like the 28.8K modem. Nevertheless, out of loyalty to Telalink folklore, once the story (or at least a version of it) came out years ago in a local newspaper, I no longer felt compelled to stay quiet and, around this fourteenth anniversary, it‘s time to offer my version of the events that led to November 22, 1999.
1999 started with a bit of a reprieve for me. With the help of Frank Woods, I was able to negotiate a payment plan with Gayle Fuson of Bohan Carden & Cherry so Telalink could cashflow again. Additionally, “irrational exuberance” was in full swing by this year. The market was going insane over tech companies. Cash was pouring into just about anything with a “.com” in its name. The NASDAQ composite was skyrocketing, hitting a record high just about every day. The Dow Jones Industrial Average was also hitting new highs but the tech-heavy NASDAQ was the new sexy. Everything was coming up roses for everyone but business schools. They were suffering because 20-somethings saw no point in spending three years getting an MBA when they could become a “dot-com millionaire” in a few months with nothing more than a radical idea to “shift paradigms” or “create “synergies” with a business plan that didn’t even include a revenue model. “We will monetize this model later,” was a typical statement.
Several businesses were setting up servers with Nashville Regional Exchange Point (“NREP”), so that was going well. By spring, Ken and Jerry from ISDN-Net and the Telalink leadership (Bill, Tim, Bob and Thomas) began meeting about merging and that led to my meeting with ISDN-Net’s CFO about financials. Not waiting to actually merge, we soon started meeting with interested buyers and we presented ourselves as two companies that were “in the process of merging” and interested in being bought out. So many suitors came calling. I disliked most of them. We’d have visits from these arrogant, boisterous, “alpha males” who wanted us to be impressed with their grand “roll-up” plans, meaning they had all of this investor cash to buy up little ISPs so they could then become dominant players in the market. Typically, a CEO or acquisition specialist would fly in and we all had to dance a certain way. EVERY time I was in one of these meetings, I couldn’t help but feel as if I were in some kind of speed dating session (note: I have NEVER participated in a speed dating session).
It felt something like this (remember, we’re speed dating):
CEO: “Hey baby, I think I like your stuff. You got it going on.”
Telalink/ISDN-Net: “Oh stop it (fanning ourselves) We’re just a coupla little ol’ ISPs down here in Nashville who got together and had some fun. Have yourself a tall glass of sweet tea. Now, how badly do you want us?”
CEO: “Well wait a minute. I mean, you should really want ME! Take a look at my roll-up plan. We’re taking the Southeast by storm and my investors have millions! I was once a professional wrestler before I became a Kenny Rogers Roasters manager. I know EVERYTHING there is to successfully bundle ISPs and become the next big player in this biz. We’re going to be EBITDA positive by spring 2002 at the rate I’m going, baby! I’ve read The Art of War! But never you mind your pretty little head. I don’t want to bother you with such saucy language. Let’s just jump in the sack together. I’ll pay you something based on this formula that my finance guys whipped together:
(blogger's disclaimer: this is a real formula but is really just for demonstration purposes only)
I have no idea what the hell this means but you don’t want to pass this up……and you can have a big time stake in our plan going forward....”
Blah, blah, blah. Whatever “the deal” was with the buyer of the day, we usually never got beyond the meeting where everyone was trying to impress one another. Meanwhile....
My first meeting with ISDN-Net’s CFO was a bit of a disappointment. We finally agreed to peek at one another’s financial statements for the first time. ISDN-Net proposed a merger in which Telalink’s worth was 40% and ISDN-Net’s was 60%. This was most deflating and downright insulting.
“Exactly how did you come up with this?” I asked.
“The numbers don’t lie. Our revenues are a lot bigger than yours,” said the ISDN-Net guy.
“Yeah, if numbers were all the same, that would be true. YOUR revenue includes a lot of equipment sales and consulting fees. OUR numbers include a nearly equal amount of RECURRING revenue. THAT’S what matters with ISP mergers and acquisitions,” I rebutted.
And so it began. Back and forth and back and forth we went with scenario after scenario. Slowly but surely, over months, the ratio headed more toward an equitable deal. This process frustrated me and gave me a healthy concern over how we would work together. I was feeling a little nervous and somewhat leery. Taking the minority stake in an operation of “equals” was definitely eating at me but we continued the exercise for some time.
One day, in the middle of deliberations, we got a call from PSINet, the company that had a strategic partnership with NextLink and that had originally told us, at Telalink about a year prior, that we were too small for their acquisition interests. They were suddenly interested in buying our combined companies- Telalink and ISDN-Net. Rarely did we meet in the Telalink office (our space was quaint) but the usual suspects were all there, in suite 1 of the Euclid Court Building at 110 30th Avenue South. Ken and Jerry from ISDN-Net; Bill, Tim, Bob and me from Telalink; Eric Lunn from PSINet.
“We’re very interested in your companies. VERY interested,” said Eric.
“Let me tell you something….unless we’re looking at ten times revenue, you can be interested all you want but we don’t have much to talk about because that’s what it’s going take,” said Ken in a pompous tone.
“Ummmmm, WHAT?!” I asked.
“Yeah, where did THAT come from?” asked Bill.
You see, ten times revenue would have been an insane deal. No one was paying that kind of multiple for companies our size. A multiple of two to three times revenue would have been a good deal. Asking for ten times your revenue was bold but unbelievably foolish. It just sounded as if we weren’t serious or, more likely, that we didn’t know what we were doing. It gets worse...
“Okay, well, I’m not going to talk about multiples until we see your financials,” said Eric.
“We’ll overnight them to you,” said either Ken or Jerry.
“Ummmmm, WHAT?!” I asked. “I can’t have anything ready to send tomorrow. I’ve already got a busy rest of the day and it’s going to take some time to get everything compiled. I’ll need a few days if I really have to compile everything on this list!”
I was mad and starting to feel like a fool.
“Well, the sooner the better,” Eric said. Once we get what we need, we’ll be back in touch.”
That was pretty much it. Eric headed back to New York or Virginia, or maybe to his next acquisition target. As soon as he closed the door behind him, I vented my anger.
“Guys, you can NOT promise stuff on my behalf and flippantly tell someone that we’ll overnight the most current financials to anyone unless I say that I can live up to that. PLEASE don’t ever do that again. The list that he gave me is long and it will take my entire week to assemble this. And another thing....TEN TIMES REVENUE?! If I were that guy, I would have left this room as soon as I heard that! When was this discussed and how could you say something like that when NO ONE would consider that.”
I don’t remember the response but I stormed out in anger. Maybe I got an apology. I don’t know. By the beginning of the next week, I sent a FEDEX package to PSINet, certain that I had held everything up because I couldn’t meet the “we’ll send them out tomorrow” deadline.
Weeks passed and while there was no word from the PSINet people (I was certain that deal was dead), the Telalink and ISDN-Net folks had finally felt good about an arrangement that was at about a 51%/49% arrangement. Ken and Jerry had actually, maybe prematurely, had their attorney draft a letter of intent and sent it to us. All we had to do was sign and it DID finally meet with our approval. We scheduled a time for them to come over after the July 4th weekend. They would come to our office after lunch. It was pretty much set until….(Queue the music. What follows really did happen)
About 30 minutes before Ken and Jerry were to arrive, I got a call from a gent at PSINet.
“We want to buy you.” he said.
“Of course you do,” I said, sarcastically. “What’s your multiple? One times revenue?” I was starting to get pretty bold and snarky with all of these so-called “We want to buy you” conversations.
“I’m faxing a letter of intent to you as we speak. Looks like we’re landing right at just over $5.5 million. I don’t know what ‘the multiple’ is. I just know that’s what we want to pay for you.”
“That’s stock, right?”
“Stock, cash, combination. Whatever you want.”
“Uhhh, but that’s for BOTH companies, right? You guys want to pay $5.5 million for both ISDN-Net AND Telalink.”
“No, we’re not interested in them. Just Telalink. For one thing, we had to ask for their financials for weeks. And, once we got them, we saw a bunch of revenue that didn’t really interest us. We’re looking for the pure recurring revenue companies like what you guys have. Have you got the fax yet?”
Have you ever been given such astounding, such amazing, such undeniably good news that you heart started pounding hard, you started breathing really fast, you were shaking all over and you couldn’t actually formulate discernible words? I pulled the two page letter off the fax machine. The more I read, the dizzier I got.
"THIS was the deal!" I thought…."but wait! Ken and Jerry are on their way to see us right now! We CANNOT sign their letter of intent! I need to tell Bill and Tim right now!" I ran and grabbed Bill.
“You gotta…..you gottta…..you gotta look at this. C-c-c-come into my office r-r-r-right n-n-n-now……..look at this! I’m going t-t-t-o g-g-g-g-et T-t-t-tim. TIM!! TIM!!! TIM!!” I ran down the hall to find him.
I found Tim and grabbed Bob and we raced to the conference room, knowing that Ken and Jerry would be walking in any minute.
Imagine this next paragraph spoken in a nervous tone and a rapid speed:
“Okay, here’s what we do. It’s too late to call Ken and Jerry. They’ll be here any moment. We can NOT sign their letter of intent and we can NOT tell them why. They can’t know about PSINet’s offer at least right now. Keep you mouths shut. Don’t say anything! We’ll just stall. Leave it to me. Don’t say anything. Keep cool. Look normal. Act normal. Don’t panic. We don’t have to tell them anything. We’ll tell them later, in a few days. Just, everybody, stay calm. I’ll handle this.” These were my instructions and I sounded nothing like a calm, normal, non-panicky dealmaker. I was shaking all over and my voice kept trembling, my inflection indicating a very abnormal sense of nervousness. I needed to pee.
“We have to tell them!” said Bob. “It wouldn’t be right. They’re expecting to merge with us. They’re going to know something’s up. We’ve been talking about this for months!”
“I don’t disagree with you. We’ll tell them. Just can’t do it today. We HAVE to look at this offer from PSINet and we HAVE to do what’s in the best interest of the company…..and a $5.5 million cash offer is sounding MOST interesting. Look, today, we do nothing with no one but let’s keep cool and defer signing with ISDN-Net. We just need to….
KNOCK KNOCK! The sound came at the door. I hid the PSINet fax in a folder and clutched it tightly.
In walked Ken and Jerry.
“Hey guys! We’ve been looking forward to this moment all day, haven’t you?” inquired Jerry.
Bill, Bob, Tim and I collectively swallowed.
“Hey, have a seat. How’s it going?” one of us said.
“Okay,” said Jerry rather confidently. “We’ve done everything you requested. This letter of intent has got everything we negotiated included and, even though we feel like you’re getting more than your fair share, well, we’re ready to do this deal with you guys. Let’s sign this letter and get on with this merger.”
My voice was still unstable.
“Oh, yes, well, well look at that letter. It sure is there….”
“You see? Look! 49/51! It’s all there,” said Jerry. He looked at me, noticed my discomfort, wondering if there was a problem.
“Yeah, uh, oh yes. Yes indeed. Looky there. Yeah, w-w-well, you see. So, I don’t think we want to sign today…just yet. I mean, we need a little time to ourselves on this. You understand. You know. It’s a legal thing. I just think..” My voice trailed off.
“But this is what we’ve all been working toward for the past six months!” Jerry started to look pale as I gazed away toward Bill, Tim and Bob. Their heads were bowed as they stared at the table. Jerry was trying to make eye contact with someone. He knew something was terribly wrong. “I don’t get this. What’s wrong? Why won’t you sign? That’s why we’re here!”
“Listen,” I said. “I’m sorry. We didn’t mean to make you guys drive all the way up from Brentwood just to be told that we won’t sign. I’m, I’m really sorry about that.” My hands were clammy as I fiddled my fingers.
“We just need a little more time,” said Bill, his hand suddenly covering his mouth as his elbow rested on the table.
“That’s it. More time,” said Tim, looking up at the ceiling.
Bob couldn’t say a word.
Jerry lay his head on the table, his arms enveloped around his head as if he were an elementary school student who had just informed the teacher- “I don’t feel so well,” which would be followed by “Just put your head down on the desk, honey.”
Indeed. Jerry was down and out. Thirty minutes earlier and ISDN-Net and Telalink would be in agreement to merge. Thirty minutes, yes, but they DID have months to come up with a fair deal that would have rendered the PSINet offer a non-issue.
Still, I couldn’t help but feel sorry for the ISDN-Net guys. They were clearly disturbed and frustrated as we nervously sat around the table, no one offering any hint of what had happened.
“Well…..just call us,” said a defeated Jerry. “Let us know as soon as possible. We need to get this done.”
And I silently knew that it would never be done.
My heart rate returned to normal. My breathing, not as short and rapid. We sat at the table a little longer after Ken and Jerry. We looked at each other, eyes shifting from one to another while keeping somewhat still.
“That was weird,” said Tim.
“It was uncomfortable,” said Bob.
“We’re selling out to PSINet!” said Bill, smiling from ear to ear.
“I’ll call Frank Woods and Anne Arney,” I said. “Let’s call a company-wide meeting and meet back down here in 30 minutes. We’re doing it. We’re selling.”
It was July 6, 1999 at approximately 2:00 pm.
To be continued….
AUTHOR: Thomas Conner
Thomas Conner is the co-founder, president and chief financial officer of Sitemason, a hosted, supported alternative to Wordpress and Drupal, built for agencies, freelance designers and developers.