Acquisitions Fuel Network One's Growth

Posted: 06/1998

Acquisitions Fuel Network One’s Growth

By Peter Meade

Network One’s Skip Lane is in the fast lane when it comes to expansion plans for his
fast-growing company. His goal for this year: Finalize three more acquisitions and
integrate them into Network One’s existing operations.

Taking the acquisition path for corporate growth may be looked upon as chancy by some
industry observers, but it’s a strategy that has been exercised with superlative results
by Gene E. "Skip" Lane Jr., who founded the Atlanta-based reseller in June 1992.

In fact, before the first quarter ended, Lane, president and CEO, already was in
preliminary discussions with three more acquisition prospects. Is he planning to hit the
trifecta early and relax for the rest of the year? It’s not likely because Lane admits he
doesn’t expect all three of his current targets to hit the bull’s eye.

"These three are not necessary my goal," he explains. "The right
three are more like it."

Choosing "the right three" could continue the string of recent successes that
began in July 1996 when Network One bought Freedom Communications, a small Florida-based
reseller. Starting small helped Lane learn much about all that was ahead in playing the
acquisition game. It’s a multifaceted proposition, he says, and it’s likely to be
different every time out.

He put those lessons to good use just three months later when Network One made a larger
acquisition, purchasing the long distance operations of Ram Technologies Inc., a
facilities-based reseller based in Ashland, Ky.

Up to this point, Network One had been a switchless reseller with a customer base built
around several hubs along the Eastern seaboard. Now Lane was pondering whether he wanted
to join the "switched" brigade while he was determining the best sales strategy.
In its early years, Network One used agents in Connecticut, Virginia and the Bell Atlantic
Corp. region with direct sales from its headquarters serving Florida, Georgia, the
Carolinas and BellSouth Corp. territory. Both approaches have their merits, he says; it
depends on where you’re selling and to whom. However, for consistent growth, a combination
approach is the best road, he adds.

It’s not that the company wasn’t already on the growth track. In fact, Network One had
shown a steady upside on its own, reaching the $5 million mark in only its third year of
operation. While he was proud to have reached that plateau, Lane realized he was facing
the figurative fork in the road.

"We had grown to a point where we were faced with two choices," Lane says.
The signs ahead proclaimed "Sell to a bigger reseller" or "Raise
significant cash and really grow the business." Although it was a tough
decision, it was one with which he was familiar.

When it came time to decide, Lane chose the road he had not traveled before. Before
divestiture, he had founded resale company Southwestern Telecom Systems, which he grew
before it was sold to a division of ITT Corp. in January 1985. This time around–armed
with the sales and marketing know-how he gained during a five-year stint at Cable &
Wireless Ltd.–Lane decided to set his sights on a higher goal: turning Network One into a
Tier Two carrier, which Lane defines as having revenue topping $100 million. To achieve
this goal, Lane would have to hire a banking consultant, fill out his management team with
seasoned industry veterans and raise a serious amount of equity capital to fuel the
growth.

Network One sent out eight proposals for financing and, much to his surprise, Lane
received a staggeringly positive three responses in just 30 days. Buoyed by the quick and
plentiful reaction he received from the financial community, Lane chose Nashville-based
Richland Ventures LP, which delivered $2 million in February 1996. This put Network One a
step closer to its goal of reaching Tier Two carrier status. According to Lane, Network
One will reach Tier Two status in three to five years.

Lane is quick to clarify that his plan is not to rule the world. Instead, he wants to
acquire or grow additional customer density in Network One’s already established service
area, which encompasses from New Jersey to Atlanta, south to Alabama, west to the
Mississippi River, then north to Ohio, Illinois and Indiana. This means Network One’s
customer base, which consists mostly of small- to medium-sized businesses with monthly
bills of between $100 and $4,000, overlaps three regional Bell operating company
regions–those of BellSouth Corp., Bell Atlantic Corp. and Ameritech Corp.

While Network One’s acquisition of Ram’s long distance business brought instant
results–adding some $330,000 a month in billings to the company, with 80 percent of the
traffic in West Virginia, and the rest in Kentucky and Ohio–with the expansion came the
associated growing pains, Lane admits.

Acquisition Challenges

It took Network One some nine months to integrate the billing of its new customers with
its existing system. "We spent a lot of time toggling back and forth between
systems," Lane says. "While it was much more difficult for us than we expected,
we had to make sure our new–as well as existing–customers never felt our pain."

It also took longer than expected to decommission Ram’s switch network and migrate the
acquired traffic to Network One’s existing network. This process took a year, almost twice
as long as expected and included a twist.

"We actually saved money by pulling [Ram’s Harris Corp.] 20/20
switch," Lane explains. "[The company] had an iron-clad contract with AT&T
for T1 service, but [Ram’s] traffic wasn’t filling the network. So why have a switch? We
were better off without it."

Network One now is using a hybrid approach. "We go switched where it makes sense,
where we have high amounts of traffic," Lane says. "Otherwise resale makes
perfect sense."

Acquisitions always bring with them such integration challenges, says Lane. A key
concern, perhaps above all others, many times is the ability to achieve compatibility
between the acquired and existing billing systems. "The secret is doing your homework
up front," Lane explains.

However, sometimes even doing your homework doesn’t prepare you for the surprises
acquisitions can bring.

When the sales results for 1996 fell below expectations, Lane began searching for key
individuals who could better fit the fast-growing, entrepreneurial spirit he was trying to
foster. Paramount to achieving this growth was strengthening Network One’s agent
population. Lane wasted little time as he poised himself for his biggest acquisition yet,
which came last October in the form of ProCom Inc.

Not only was ProCom the largest independent long distance provider in West Virginia,
the company added 48 more employees to Network One as well as 70 established agents.

To fund the acquisition, Lane secured $2.5 million from Atlanta-based Cordova Capital
Partners LP and another $500,000 from Richland Ventures. At the same time, he gained $10
million in bank credit for future expansion and integration. The bold move served not only
to take a fierce competitor out of the market, but it also added more customer density to
Network One’s service footprint.

While the additional minutes for its established network helped Network One keep its
costs down, Lane says another appealing attraction of the ProCom acquisition was its
strong back-office operations.

He was so impressed with ProCom’s customer care operation that before the negotiations
were finalized, Lane had asked ProCom’s chief financial officer Julian Jacquez to stay on
board. Jacquez says he was surprised by Lane’s offer. He knew that Network One already had
a top financial executive, Frank J. Pazera, who joined Network One in April 1997 after
stints with Arthur Andersen and MCI Communi-cations Corp., but Jacquez liked Lane’s
management style. "Skip stays out of your yard and lets you do your job," he
says.

And as always, Lane had a plan. He wanted Jacquez to stay on after the acquisition was
completed as the vice president and general manager in charge of the entire ProCom
operation, which was to stay in its Bruceton Mills, W. Va., quarters.

After all, who knew what Network One had acquired better than Price Waterhouse-veteran
Jacquez, who joined ProCom when his main responsibility was to get the company into the
best possible light for being acquired.

"We were a willing seller, who knew the value of the company, looking for an eager
seller who saw the value," Jacquez explains. "And it worked."

The fact that ProCom had more than 10,000 customers and more than 40 employees at the
time of the merger–making it twice the size of Network One–posed a difficult question:
Should Network One pull the plug on its newly acquired West Virginia operation and move it
all to Atlanta?

While many industry observers would expect that to happen, Lane decided to leave things
as they were in West Virginia. He even moved some of the Atlanta-based operations center
to ProCom. Jacquez’s operation now includes maintenance of the customer base,
provisioning, new orders and agent support. He also has set up a special "retention
group," which fights churn and constantly monitors the status of key accounts.

According to Jacquez, he’s glad to have made the transition from a financial focus to
thinking operations, because the next acquisition is "just a matter of time."
All the work that has been done on Network One’s infrastructure means if the next
acquisition brings 5,000 more customers, the "bough will bend, but it won’t
break," Jacquez says.

The biggest challenge now is floor space–or the lack of it. The large conference room
at ProCom has just been turned into a cubicle city for additional customer service
personnel. There are some 50 full-time employees in West Virginia now, Jacquez says, and
the cultural changes from the merger have been accomplished.

"At ProCom, it was whoever got to the shovel first started digging," he says.
"Now we can’t do things as quickly. We have the management in place to talk things
through and decide the best course of action for everyone."

CLEC Status

For a company that was founded on its own kind of "Friends and Family"
program–Lane borrowed money from friends and family and dipped into his 401k account to
start Network One–the future now includes more than just being an acquisition-active
reseller.

Network One has been certified for competitive local exchange carrier (CLEC) status in
12 states with 10 more states pending, Lane says. Having signed and filed reseller
contracts with Ameritech, Bell Atlantic and BellSouth, Network One has scheduled to begin
turning up local service in July. A similar deal with GTE Corp. is signed and pending
filing, he adds.

Just joining the hyperactive CLEC market is not enough for Network One. "Our goal
is to be one of the first CLECs to achieve consistent profitability," he says, adding
that the company’s opening strategy is to resell the incumbent local exchange carrier’s
(ILEC’s) service in areas where Network One has customer density.

In addition to the CLEC market, Network One is getting into another hot area: Internet
access. The company soon will offer dial-up Internet access in 300 metropolitan areas
through an agreement with a major Internet service provider (ISP). The Internet billing
will be integrated with the company’s existing local and long distance offerings in one
convergent bill, Lane says.

Today, Network One’s 15,000 customers are offered services including local, long
distance, paging, data, 800, operator services, conference calling and enhanced calling
cards.

"We want to deliver applicable products at reasonable price on a convergent
bill," Lane says. "Customers who pay, say, $300 a month don’t necessarily want
frame relay–perhaps they want just voice mail. Our smaller customers are not likely to
have an IS [information services] manager, so we try to serve as consultant to them."

With Network One on course for revenue of $28 million in 1998, Lane remains focused on
getting to the nine-digit mark. What does a prime acquisition look like?

"We’re always looking for resellers with an established presence within our
geographic footprint," he says.

And what does an attractive acquisition look like?

"A profitable reseller with a customer base of $250,000 to $3 million a month in
billing," Lane says. "We’re looking for mostly commercial service, sold direct
or by agents, not by telemarketing."