MEGAPATH NETWORKS PURCHASES PHOENIX NETWORKS → Good news? Or Bad? Read the fine print...

The transaction was an asset sale, in which liabilities are normally not assumed, not a stock sale, in which liabilities (including the obligation to honor contracts) are assumed. Did MegaPath assume the contracts entered into with Phoenix residential customers, or is the obligation to provide service still that of Phoenix networks? If the contracts were not assumed, will service be provided on a higher per month cost at slower speeds? For example, Phoenix had a deal through Northpoint for 784/384 static IP at $39.95 per month; MegaPath is substantially more for that speed.

My concern was heightened as I read the following comment was also made in the press release: "PhoenixDSL home users can expect continued service as the company determines strategic alternatives for residential service." It will be interesting to see what this means. Will residential accounts be sold to other providers? And if so, what assurances will residential users have that the speed, service and connectivity they currently enjoy will be maintained for the duration of their agreements, and beyond? I for one do not want to roll to different service providers over and over again. It was painful enough getting the service in the first place, imagine the pain of switching providers!

I hope that these and other questions will soon be addressed by MegaPath.

The announcement states that Megapath has acquired PhoenixDSL for stock, not that Megapath has bought Phoenix's business customers. If Megapath has acquired Phoenix then they also acquired Phoenix's liabilities. The only way that Phoenix can rid themselves of their requirement to honor their contracts is to declare bankruptcy or to sell or give those contracts to another party which will assume the responsibility for the honoring the terms of the contract.

The most likely scenario is that Megapath will sell the residential Northpoint customers to Verizon and the residential Rhythms customers to Flashcom. They may also choose to keep the current customers on the grounds that the big cost, the 2K to hook up those customers, has already been paid.

Actually, the announcement says: "The terms of the deal include the purchase of substantially all of the assets of Phoenix Networks in exchange for MegaPath Networks stock." This means that the "currency" used to purchase Phoenix's assets was MegaPath's stock. The corporation itself (Phoenix) was not acquired. MegaPath only assumed scheduled assets (note the usage of "substantially all of the assets of Phoenix"). The liabilities and existing contracts Phoenix had, unless assumed by MegaPath, remain the responsibility of the corporate entity which made them (Phoenix).

It is possible that MegaPath only received an assignment of the revenues due under the contracts for as long as MegaPath continues to service them. This could be only up to the point of the determination of the "strategic alternatives for residential service", as stated in the announcement.

Asset purchases are a preferred method for a purchaser to acquire the business of a seller, as no liabilities are assumed except those expressly agreed to be assumed. In an asset sale, the seller continues to exist as an entity still owned by the shareholders of the seller, but from an accounting standpoint, the assets purchased are taken off the books (having been sold), and the consideration paid (here the stock of MegaPath) is carried on the books as the value received for the assets.

The whole issue of what happens to existing customers and their contracts is still up in the air as far as I am concerned. MegaPath will continue to service them, but if the contracts were not assumed, then for how long is up in the air.

Do you think they will sell the customers that provide the most revenue, i.e the business customers? I think not. I think you are very wrong in your speculation. Why buy a company then sell off the revenue producing part? Doesn't make sense does it?

No I think that they are going to sell the residential customers not the business customers. The announcement clearly states that Megapath is integrating the business customers into their own system immediately, it's the fate of the residential customers that is up in the air. I think that Megapath will probably sell the residential customers to Verizon and Flashcom.

Thanks for the didactic piece, starman, on asset sale v. stock acquisition. Generally, asset sales involve only the purchase of selected assets held by a corporation, and not necessarily all the assets on the balance sheet. A stock transaction involves the purchase of the equity of the corporation, and therefore consumes the purchase of all the assets of the corporation as well as all of its liabilities. No exceptions.

While you understanding of an asset sales is for the most part accurate, you have to step back and appreciate that NO company is going to sell an asset without also transferring to the purchaser the attendant liability. So, any hypothetical which presumes the transfer of an asset without the attendantliability is a mistaken. Often a company has some extrinsic liabilities on its balance sheet, unrelated to any assets it carries, and therefore makes an asset sale more attractive than a stock acquisition. An asset sale is also attractive when the would be suitor is NOT INTERESTED in ALL the assets of the selling corporation.

You do point out, that most here have failed to discern, that Megapath has agreed to acquire SUBSTANTIALLY all of Phoenix's assets, but certainly NOT ALL. At issue here is the future of Phoenix's residential service, or assets. The fact is, judging from the press release (PR), we don't know the facts, but can only draw inferences. We don't know for a fact that the residential services have also been transferred to Megapath and part of the asset sale but the conclusion is NO.

IMHO, the PR leads one to conclude that it is more likely that the sales DOES NOT INCLUDE the residential business. First and foremost is the language that describes how business service will be immediate and seamless, but residential services will not. "PhoenixDSL home users can expect continued service as the company determines strategic alternatives for residential service." I also look to (1) the statement by Foster like " . . . complement MegaPath's passion for customer care and laser-sharp focus on the small/medium business and telecommuter segments," which fails to mention residential service; and (2) the juxtaposition of the statement concerning residential service next to Phoenix's "[p]lans . . . to maintain a St. Louis presence. The conclusion is that residential service is NOT part of the PRESENT sale.

So, when discussing the future of Phoenix's residential service, it is more convincing to discuss from Phoenix's perspective, not Megapath's. That's not to say that Megapath might not pick up Phoenix's residential business, but that as of now, it hasn't. It may be part of continuing negotiations. We just don't know.

As far as existing contracts, they will be upheld. Phoenix cannot void them, and with respect to business accounts, Megapath will honor them. If not, either company will be subject to damages for breach of contract. The more likely concern is what will happen to user accounts upon expiration of the contract term. Business customers will likely see their monthly subscription fees increased to a level equal to what Megapath currently charges its other customers for similar service. Residential customers will either see their accounts terminated, or hopefully switched to another ISP such as you or another suggested, i.e. Verizon or Flashcom, and such service repriced accordingly.
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Regards,

lml