Scott Koegler recently wrote an article on "What's Next for GXS". My immediate reaction was this sounds very much like the Penn Central Railroad / CONRAIL disaster that took 30 years to finally solve. Lots of common keywords: "essential services", "greedy investors".
A little background then lets go for it. I will try and assume the common ground of readers is "investors". I will try and carefully explain terms in the VAN industry and railroad industry.
In 2002 General Electric decided to divest their VAN business. Francisco Partners LP invested on a ten-year term in what became known as GXS. 10th anniversary rolls around and it became clear to Francisco that the investment was not turning out the way it had intended. Funny, but nobody else wants to pick up their investment (and the debt attached to it). Even an IPO is not an option. Again, Scott has laid out where GXS is (or isn't).
Now why do I bring up Penn Central? Substitute "stock merger" for "private placement", but keep the word "debt". You have a classic "history repeats itself". Penn Central was created by the merger in 1968, of the Pennsylvania Railroad and the New York Central Railroad. They immediately became the "darling" of the stock market, but by 1970 the company had filed for bankruptcy.
|Talking Points||GXS||Penn Central / CONRAIL|
|What does an EDI VAN have to do with a railroad?||A VAN is like the U.S. Freight rail system. Both take your product; pack it in their own container (envelopes/files; box cars); move it to the recipient by a network of rails or phone:data lines (both built by private companies); switch from one to the other (no single VAN or railroad covers the whole country....yet); and finally deliver to the recipient (rail siding or VAN mailbox).|
|I thought these companies were all “blue chip” folks||General Electric spunoff GXS because it no longer fit their strategy. It didn't fit right on those charts with “cash cows”, “rising stars”, and dogs.||New York Central and Pennsylvania Railroad had been successful and paid high dividends since the mid 19th Century. Changing business conditions convinced everyone a merger would eliminate redundancy and make a combined company stronger.|
|What went awry with their business plans?||GXS's “managed services” sector is growing, but other business, including VAN, is not. They have a huge debt service hitting them and are scrambling for revenue sources by considering charging subscription fees for every cross-connect. This might backfire by sending customers to look for other methods and avenues to transact electronic commerce.||Losses on commuter services
Mail and express business to air or truck
Management focus on amusement parks and other non-rail assets
Court decreed PC must include New Haven Railroad in their merger
|Couldn't a stronger company just buy them? Couldn't they re-organize?||Francisco Partners carried out a market check with JPMorgan Chase on refinancing a subsequent IPO. The numbers were just not there! This is the same reason that nobody will buy them in total.||Other railroads had the same rate regulation problems corrected with passage of the Staggers Act in 1980 when many of these constraints were loosened, giving railroads more freedom to compete with trucks.|
|Could GXS sell off it's VAN business and survive?||Yes. Scott's article gave some ideas. Another idea would be a “neutral party” like a telecomm company who is good a rate setting and would charge all parties fairly (and still make a profit). Possibles are Verizon or Orange. Or forget the telcomm and go with pure Internet: VAN solution||CONRAIL took essential stuff. Long Distance Passenger Service to AMTRAK. Commuter service to New York's Metropolitan Transportation Authority and others (where it really belonged). Non-rail assets stayed with Penn Central and either survived (real estate), failed, or were sold.|
|Both companies enjoy/enjoyed a degree of monopoly protection. Shouldn't that mean they would “always” make a profit?||If your customer uses their services, then you are forced to use their service to reach your customer. With fair, equitable pricing, there should not be a problem ...but there is.||The railroad side of a monoply is simple. If your customer is on their railroad, you have to use them to reach customer. Else go with trucks. Guess too many shippers did just that.|
|Both companies had financial reports that were (are) as “clear as mud”. Both sound like the fruit dealer who has rotting pears and worms in his apples but talks about his great cherries and super strawberries.||What is the difference between “managed services” and “messaging services”? What is “data synchronization”? If a transaction was book incorrectly, who would know?||Look at the history of their stock price. Nobody knew how bad the bleeding was. Sometimes a fine line between regulated (railroad) and unregulated (amusement parks, etc). Always a way to move $$ from one to the other.|
|What about government intervention to protect “essential services”?||Some countries (example: South Africa) view VAN services differently but U.S. Has historically ignored them and left to the private sector. But anything is possible.||Congress created CONRAIL in 1976 to acquire the rail assets of Penn Central (and some other “problem children”). CONRAIL was sold in 1997 to CSX and Norfolk Southern. The government realized a “profit”.|