The Ottawa Citizen
Tuesday, November 11, 1997

U.S. firm makes low-ball bid for iStar

Deal would boost suitor PSINet's presence among Canadian Internet service providers

by Kristin Goff

It's been a turbulent ride for Ottawa-based iStar, an Internet service provider whose shares jumped 83 per cent during the first day of trading only two years ago.

Now PSINet of Herndon, Virginia, plans to acquire iStar for only $1.20 a share, or $35 million to beef up its small Canadian operations. IStar has 60,000 individual and 2,500 corporate customers.

iStar shares tumbled 42 cents to $1.17 on the Toronto Stock Exchange on a volume of 754,000 shares, more than eight times its three-month daily average. PSINet Inc. fell $ 1/32 to $72 1/32 U.S. on the Nasdaq Stock Market.

Jim Carroll, a Toronto Internet consultant, said iStar suffered from unrealistic expectations from the beginning.

Its spectacular price rise at its IPO in November 1995 -- from $12 to $22 on the first day -- resulted from "huge hype" about the potential of the Internet then sweeping the stock markets and a misunderstanding over who the big players would be, he said.

But iStar's management also made some poor decisions, lacked focus and tried to grow too fast in too many directions, Mr. Carroll said.

"I think they had dreams that were too grandiose", he said. "They got caught up in the Internet hype and misfocused their energies."

Last month, iStar officials warned shareholders they faced a serious cash crunch that would force them to look for new sources of capital. The company's $3-million cash reserve might only last until the end of the next fiscal quarter, Feb.28, they warned.

A key part of the proposed deal took effect yesterday, with the first instalment on a promised $5-million loan, which PSINet Inc. is making to ease iStar's cash crunch.

iStar shareholders will receive non-voting, eight-per-cent cumulative convertible shares of PSINet Inc.

iStar marketing manager John Bush said the takeover offer was a good deal for its customers and shareholders. Despite what some analysts say, Mr. Bush said iStar had been "razor-focused" on its business plan in the past year and has accomplished much in its short corporate life.

"We've deployed a full national network in a span of 2 1/2 years, which is fairly remarkable."

"We saw the next step was to say to a multinational partner, 'Let's take it to the next level'", said Mr. Bush.

PSINet will be able to provide global connections that will add to services customers now get, he said.

The fate of the 200 iStar employees, including 100 people in its Ottawa office, is unknown. But Pete Wills, PSINet's chief executive, is optimistic that most, if not all, would find work within the merged company.

PSINet's Canadian subsidiary has 81 employees. The headquarters would remain in Toronto, but officials said it intends to keep its Ottawa office open.

iStar is the latest takeover target in a series of consolidations within the Internet industry that have swept North America. This month Netcom Canada, a unit of Netcom On-Line Communication Services Inc., bought 12,000 subscribers from HookUp Communications Corp.

Mr. Wills couldn't say how many Canadian customers PSINet's wholly owned subsidiary serves. But with more than 25,000 corporate customers and wholesale operations serving "a few hundred thousand" individuals, the company is among the biggest players in North America. It is expanding its infrastructure to add 16,000 kilometres of wide-band fibre-optic communications network that will serve Canadian and U.S. customers.

Besides requiring shareholder and regulatory approval, the proposed merger is contingent upon reaching an agreement with Bell Canada, which provides iStar with global computer-network services. Bell and iStar worked out a deal in July that gives Bell an option to buy 25 per cent of iStar in exchange for $20 million worth of services over the next 18 months.

Officials of PSINet and iStar expressed confidence a deal could be worked out, though no detailed talks have been held with Bell Canada.

Tom Gillette, vice-president of outsourcing for Bell, said the company hasn't received any debentures from iStar that could be converted into equity. As a result, PSINet will have to pay Bell for the services it has provided and work out the details of the contract's remaining 14 months, he said.

with files from Bloomberg News

Copyright © 1997 by The Ottawa Citizen. All Rights Reserved. Reprinted with permission.