Intermedia to Swallow Digex

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Intermedia to Swallow Digex

By Shannon Henry
Staff Writer

Add one more to the list of Internet service providers and telecommunications companies that have merged, hoping to offer a supercarrier menu of voice, data and Internet services.

Intermedia Communications of Tampa, Fla., last week announced plans to acquire Digex Inc., Beltsville, Md., for $13 a share, or $150 million in cash. The combined company will have 18,000 business and government customers and 1,500 employees.

The deal ends several months of Internet industry speculation over what company might buy Digex, which, like many Internet companies, has yet to see a profit. In the first quarter of 1997, Digex lost $9.6 million and posted sales of $8.7 million. The acquisition is expected to be closed within 20 business days.

Robert Manning, Intermedia's chief financial officer, said his company pursued Digex because of its employees, personality of management, company culture and Internet expertise. He also said he looks forward to having a presence in the Washington area, where there is much Internet activity.

"There's a huge talent pool of Internet-savvy employees here. ... It would be hard to find them in Tampa," he said.

Christopher McCleary, the former American Mobile Satellite Corp. executive who has taken the company public, national and now has sold it since joining Digex in February 1996, will stay on as chief executive officer. Digex will keep its name and Maryland location as a subsidiary of Intermedia.

Doug Humphrey, who founded the company in 1990 and is now chief technology officer of Digex, made $13 million on the deal as a shareholder.

Doing the deal in cash rather than stock made it particularly appealing to the shareholders, said Humphrey. "There's no risk with cash," he said. "It's about as straight a deal as you can get. Humphrey said he would stay with the company as long as there is creative work for him to do.

As for the company he built, Humphrey said Intermedia will be a great match.

About 75 percent of Digex's backbone network overlaps with Intermedia networks. In part because of that synergy, Intermedia will save $4 million in the second half of 1997, $12 million in 1998 and $14 million in 1999, said Manning.

"This acquisition does not divert our attention from pursuing global telephone market opportunities, but strengthens our ability to access it," said David Ruberg, chairman and CEO of Intermedia in a conference call with analysts and reporters.

Manning agreed that the acquisition was yet another example of Internet service providers combining with telcos to save money on infrastructure, create a bigger company, and thereby deliver better service. "We now have one of the broadest product lines in the business," he said.

Last year, UUNet Technologies Inc., an independent ISP in Fairfax, Va., was bought by MFS Communications in Omaha, Neb. Those merged companies were soon swallowed by telecom company WorldCom Inc. in Jackson, Miss. Just last month, giant telco GTE Corp., Stamford, Conn., said it would merge with BBN Corp., an Internet company in Cambridge, Mass.

Now that UUNet and Digex have been bought, the last large independent ISP in the Washington region is PSINet in Herndon, Va., which is also not yet profitable, though it is considered a major Internet player. Industry-watchers have also been expecting a merger announcement from William Schrader, the founder and CEO of PSINet.


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