McCleary Sets Lofty Goals for New Firm USi

Christopher McCleary

McCleary Sets Lofty Goals for New Firm USi

By Richard McCaffery
Staff Writer

Local entrepreneur Christopher McCleary has bigger plans for his new company, USinternetworking Inc., than he did for Digex Inc., the Maryland Internet business he grew from 60 to 600 employees and took public in less than 20 months as chief executive.

The 45-year-old chairman and chief executive officer expects to increase the number of employees at Annapolis, Md.-based USi from 120 to 1,000 by year's end through a quick series of acquisitions. He plans to raise nearly one-fourth of the $1 billion he needs for the business by the fourth quarter. By the end of 1999, he expects USi to have revenues of $200 million.

Founded by McCleary in January, USi will provide government and commercial customers complete Internet services when it starts North American operations Aug. 1. USi, which plans to go global, will offer everything from Web page design to supply-chain management services, electronic commerce, customer support and sales force automation.

"No other company is providing this service," McCleary told Washington Technology.

It's a big opportunity. Forrester Research Inc., the Cambridge, Mass. technology research firm, estimated the market for such services will grow to $21 billion by 2001.

"This is a good market to be in," said Ulric Weil, a research analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va. "It's potentially very big."

Described by Weil as a super salesman, McCleary has moved quickly to line up financing. USi completed its first phase of financing May 29, raising $29.5 million in equity capital from a consortium of four investors: Grotech Capital Group, Timonium, Md.; Venrock Associates, New York; Blue Chip Venture Company, Cincinnati; and Massey Burch Capital Corp., Nashville, Tenn. All four also invested in Digex, which was acquired in June 1997 by Intermedia Communications Inc., Tampa, Fla.

In addition, US West Inc., Englewood, Colo., announced July 7 it had bought a minority stake in USi and that Joseph Zell, US West president, will fill the last seat on USi's board of directors.

McCleary, who said he has invested "seven figures" in USi, said the company is no longer seeking equity partners.

"He has good venture capital behind him," said Weil, who's familiar with McCleary because Friedman, Billings, Ramsey Group took Digex public in October 1996. "He's ambitious and aggressive."

McCleary expects the second phase of financing will close in the third quarter. That debt financing will include a total of $11 million in vendor financing from Cisco Systems Inc., San Jose, Calif.; Hewlett-Packard Co., Palo Alto, Calif.; and Lucent Technologies Inc, Murray Hill, N.J. USi is considering alternatives for the third phase of financing that include a public stock offering.

Kevin Moore, research analyst at Bankers Trust Corp., New York, said McCleary has a lot of credibility with financiers. Bankers Trust is the holding company for Baltimore-based B.T. Alex Brown Inc., a securities firm working with USi.

McCleary has shown an ability to work with Wall Street and has been successful with traditional telecommunications companies as well as emerging companies like Digex, Moore said.

"You put all three together, and you've certainly got a money winner," he said.

McCleary got the idea for USi while he was chairman at Beltsville, Md.-based Digex.

"At Digex we would get assignments to manage Web sites, but what we received wouldn't work," he said. "What we're going to do is bring in the assumption of total responsibility for the operation of that system."

Other companies offer bits and pieces but not the whole package, McCleary said.

Still, USi is not the only kid on the block, Weil said. Companies like PSINet Inc., Herndon, Va., and Digex as well as big telecommunications and computer companies like AT&T Corp., New York, and IBM Corp., Armonk, N.Y., offer services similar to those USi proposes.

"It's a very well recognized and identified need," Weil said. "It's essentially outsourcing Internet management for a company whose core business may be selling dresses, and they don't want to be bugged with all the technology."

USi hit a roadblock during its first attempt at an acquisition. After trying to work out a deal with publicly traded PSINet, McCleary withdrew his offer in February.

PSINet is an Internet service provider that connects businesses to the Internet and provides a range of Web services. Michael Binko, PSINet's spokesman, said it never received a formal bid from USi, just a fax outlining the terms for an offer. The board took it seriously but decided to remain independent, Binko said.

The PSINet setback did not dampen McCleary's enthusiasm for acquisitions. He picked B.T. Alex. Brown in late June to provide advice on mergers and acquisitions, and he is negotiating to buy three systems integration companies.

McCleary is looking to acquire firms with technically skilled workers and a strong customer base so "it accelerates our time to market," he said.

Though he declined to disclose the names of companies with which he is negotiating, he said all three are small, private companies. Two are based in the Washington area and one is in the Midwest.

McCleary expects to close the first deal within a few weeks and make a total of five or six acquisitions this year, giving the company revenues of about $80 million by year's end.

USi is building four data centers worldwide to connect the Internet backbones of North America, Europe and Asia. The centers are in Annapolis, Silicon Valley, Calif., Tokyo and Frankfurt, Germany, and are scheduled to open between July and October. Each one is costing $10 million.

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