EarthLink's New Edge

The ISP buys a nationwide CLEC as it expands its platform beyond the consumer base and into the business world.

By Jim Wagner | Posted Dec 13, 2005
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EarthLink said today it will expand its business reach with the $144 million purchase of New Edge Networks.

New Edge Networks, a local exchange carrier (CLEC) focused on business users and services, owns and operates a nationwide broadband network. It offers business services, such as frame relay and virtual private networks (VPN) , as well as T1 and OC-grade Internet access.

"We believe New Edge is a great company and offers Earthlink a significant opportunity to quickly, cost effectively, enter the fast-growing U.S. IP/VPN market," said Gerry Betty, EarthLink president and CEO. "With New Edge's executive team, coupled with their sales force and distribution channels, and EarthLink's financial resources, we expect it to significantly grow in this market."

EarthLink's buy reinforces its strategy to become a total communications company, rather than the consumer dial-up giant where it has its roots.

The ISP recently retooled its business organization around four units: voice and access; municipal Wi-Fi; value-added services; and its value and small- to medium-sized enterprise (SME).

The New Edge Networks acquisition puts the carrier under Bill Heys, EarthLink's executive vice president and value and SME group president. The acquisition today, he said, gives EarthLink a large platform to expand into the SME market.

Tied with New Edge Network's national footprint, EarthLink intends to launch its voice over IP (VoIP) service and focus on VPN services for the small-office, home-office (SOHO) and SME markets. Also planned is integration with Aluria Software, which EarthLink bought in August.

New Edge Networks has long been focused on small and mid-sized markets rather than the larger urban centers in the U.S.

This strategy keeps the carrier away from much of the competition, particularly Verizon and SBC who focus their efforts on the largest cities within each state. That meshes well with EarthLink, which also targets the top tier, or layer 1, cities.

"EarthLink focusing on the major cities and New Edge adding in the layer 2 and 3 really gives us a huge opportunity here," Heys said.

Despite 23 consecutive quarters of growth, New Edge Networks has been operating under tight constraints for a number of years following the meltdown in the CLEC industry.

In 2000, the New Edge cut 30 percent of its staff and announced it raised $140 million in equity and debt funding.

A major part of the $144 million acquisition deal includes a $60.8 million payout to equity holders and $53.8 million for debt, expenses and other liabilities.

That, coupled with the Federal Communications Commission's recent proposal to deregulate DSL pricing rates, made financial backing by a company such as EarthLink more palatable.

The cash-and-stock purchase is subject to regulatory approvals and undisclosed closing conditions; officials expect to close the deal in the first quarter of 2006. EarthLink officials plan to keep all 345 New Edge Networks employees, as well as the company name, intact and treat the company as a wholly-owned subsidiary.

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