TMC Enjoys a "Rebirth"

Posted: 05/1998

TMC Enjoys a "Rebirth"
Marsch Looks to Innovative Agent Program to Rekindle Success

By Peter Meade

When John Marsch decided to return to the telecommunications business, he started by
surrounding himself with a core group of familiar faces. Indeed, if love is better the
second time around, as the song goes, Marsch says the "rebirth" of his Tri-M
Communications Inc. aims to yield similar results.

Marsch recently reunited with many of his former key managers, most of which have put
in more than 15 years in the telecom industry, to take another swipe at the industry’s
brass ring. As CEO of the new operation, Marsch says every key member of his new Santa
Barbara, Calif.-based operation, which operates as TMC Communications, also is a
shareholder.

Marsch is betting that the TMC moniker still retains some magic. The name may be
familiar to industry old-timers. In 1982, when Marsch formed TMC of California, it was one
of the first long distance resellers in the state. By the end of that decade, TMC Cal had
more than 180 employees and was the largest reseller in California. With a commercial
customer base of more than 14,000 customers and monthly revenues exceeding $3.5 million,
TMC soon became a coveted target for an acquisition. Playing his hand deftly, Marsch
waited for just the right moment before he finally sealed a lucrative deal to sell the
operation.

In January 1990, Zurich-based Omni Holdings PLC bought TMC at what Marsch claims was
then the highest revenue multiple in the telecom industry for the sale of a similar,
privately held company–five times TMC’s monthly revenue. "Today, hearing about sales
at 10-, 15-, 18-, even 20-times revenue are frequent or possible," Marsch says.
"Back then, (five times) was really something. It’s tougher to make a living today,
but if you can, there are greater benefits."

Well-Drawn Blueprint

Marsch is seeking those increased benefits this time around with a well-drawn
blueprint–something the original TMC never had. There are other differences, too.
"Today it’s a financial game," he says. "It may sound like a clichi, but
you have to have enough in the bank to make sure your resources are there."

More than just an increased emphasis on the financial side had changed in the telecom
industry during the time Marsch sat out his lengthy non-compete pact following the sale of
TMC. While he categorized that agreement as "unenforceable," nevertheless he
upheld his exile. "I held up my end because I had no intentions of coming back into
the industry," he says.

Instead he enjoyed a self-imposed early retirement, spending time at his home in San
Francisco, playing tennis or sailing the Caribbean. Then one day he received an unexpected
"S.O.S" call from a former TMC Cal sales executive. Chris Edgecomb, who had
formed STAR Telecommunications Inc., a $400 million Santa Barbara-based international long
distance carrier, wanted his services.

The call rekindled Marsch’s interest in things telecom. Realizing that sailing as a
lifestyle had lost his interest, Marsch took to Edgecomb’s cause with such vigor that he
ended up serving as STAR Telecom’s chief financial officer for a year. During this time,
he says, he helped stabilize the company’s financial picture, which culminated in the
issue of its initial public offering (IPO) in July 1997. It was the biggest IPO in
California last year, he adds.

Recharged by his success, Marsch started formulating plans for duplicating his TMC
days. It was now clear that dabbling in real estate and sports equipment–two sidelines
he’d tried–"was like watching paint dry" compared to telecom business, he says.

But there were all those changes in the telecom industry. "Things sure are
different," he says. "In 1982, we made a ton of money just off the revenue
stream. Back then a one-minute call from Santa Barbara to New York was 53 cents.
Fifty-three cents and our rates were still 30 percent to 40 percent under AT&T’s and
we were able to put 10 cents right to the bottom line."

Further evidence showed that long distance rates have gone down 90 percent over the
past 15 years, so Marsch says the new TMC needed a new strategy–or at least a new
twist–to succeed in the 1990s.

Agent Opportunity

His strategy starts with agents, but unlike the path of most other long distance
resellers, this is where Marsch gives his plot a twist. Historically, most resellers have
employed independent agents to bring in customers and these agents are paid a monthly
commission. But when or if the company is sold, agents receive nothing for their sustained
efforts. TMC’s twist promises to take better care of its agent population by paying a
bonus to each agent for the equity in their customer base when the company is sold.

While such a program has proved hot in attracting quality agents, Marsch admits it is
not a new concept–but, he adds, his program has been successful because it offers one big
exception. "Equity programs in the past have been Byzantine or
incomprehensible," Marsch says. "Our agreement is one page long. It states, ‘You
do this much business, you get this much equity.’ That’s it."

According to the agreement, agents share in up to 70 percent of the capitalized value
of their customer base when the company is sold. "For years, telecom agents have
always been shafted," Marsch says. "They help companies build and grow and then
if the company is sold, they receive nothing additional for their efforts."

The "bonus on sale" condition will not last forever, Marsch explains. The
offer is being used by TMC to attract the highest quality of agents possible. This elite
number will never exceed 50, he says. Currently there are 44 signed agent contracts, but
TMC will reduce this number on the way to stabilizing its agent representation. When the
agent stable is stabilized, Marsch says he will close the equity program. This could
happen as early as later this year. After that date, any additional agents needed will
operate with non-equity contracts, he adds.

Speed is of the essence because Marsch says the days of one-plus service being
profitable are numbered. He sees the industry transitioning from per-minute billing to
becoming a subscription service akin to cable television. Agents not involved in an equity
arrangement risk building up their business to watch it melt from under them. His remedy:
"Get something now for all your hard work." Then when the operation is sold,
say, to a regional Bell operating company (RBOC), the agents can enjoy the profits.

New Business

With his agent-based business growing and his non-compete from the STAR Telecom days
now over, Marsch also is pondering the formation of an international long distance
company, which he would base in Santa Barbara. "We’re looking to do some creative
networking around the world," he says. "We would pick our spots as countries are
deregulating at different paces." He is currently at work on the business plan for an
assault abroad. "It’s an arbitrage opportunity," he says. "But to do it
right requires acquiring a switch."

Such a move means an investment of at least $5 million per location, he says.

Once again, Marsch has his own twist for the international strategy: He wants to bring
traffic into the United States–the opposite of many other carriers–to a TMC switch in
the Los Angeles area. TMC then would deliver the traffic over its own network or utilize
interexchange carriers’ networks for specialized routes.

Another Deregulated Opportunity

If looking across the oceans wasn’t enough, Marsch also is looking at becoming a
reseller of utilities.

TMC Energy Inc. was formed in late October to compete in the deregulating industry.
According to Marsch, many of the lessons learned in the deregulation of the telecom
industry apply neatly to this new market. In addition, there is the opportunity for his
stellar agent population to bundle telecom and energy services to be a true
"full-service" utility provider.

"We already have an established agent community with a solid customer base,"
he says. "Why can’t we take those contacts and relationships and create new
business?"

But an even bigger question looms. "Can we make a business out of it?" Marsch
asks rhetorically. He admits the margins will be extremely thin and currently only
generation of power is deregulated. He is clear, however, on his ultimate motive:
"Build the business somehow and sell it off to another energy dealer," he says.

According to Dan Ruffin, vice president of sales and marketing at TMC Communications as
well as the recently appointed president of TMC Energy, "The energy industry today
has the same outward appearance as telecom did in the early ’80s." The difference
today, he says, is "people now have seen deregulation before and understand that it
brings with it cost savings and choices."

Ruffin is a key member of Marsch’s reunited management team. He started with Marsch in
the 1980s as a sales representative selling long distance and telephone systems. Two years
later he became sales manager and then stayed on when the company was sold. He was quick
to return to the TMC fold when Marsch called one day.

"John expects a lot and demands a lot," according to Ruffin. "But he is
always generous and acknowledges everyone’s contributions."

Marsch is clear on his mission. He says he sees TMC’s domestic operations as a
"two- or three-year challenge" before the best possible buyer appears. He is
setting up the international business with an acquisition or IPO in mind.

"Some people are doctors or lawyers," Marsch explains. "I’m a business
manager. My motivation is the excitement of managing a growing businesses."