Exodus To Restructure After Filing For Bankruptcy

Exodus Communications Inc. will reorganize after filing for Chapter 11 bankruptcy on Wednesday. The Web-hosting company, which houses data centers where more than 4,000 companies run their Web sites, is $3.5 billion in debt and quickly draining its cash reserves. The company posted a loss of $538 million in its second quarter ended in June, multiplying losses more than 10 times from the same period a year ago.

Exodus has secured $200 million in financing from GE Capital, which it will use to continue service to customers and fund operating expenses and employee and supplier obligations. The company, which already trimmed more than 500 jobs this quarter, leaving headcount under 3,000, said it will make additional staffing cuts as a result of the restructuring.

One analyst believes bankruptcy filing is a sign that Exodus has found a suitable takeover partner and is ridding itself of debt as part of the deal. "The reason Exodus made the decision now rather than later in the year is that it has found a strategic investor to take over operations," says Joel Yaffe, an analyst at Giga Information Group. "They must have a suitor waiting in the wings, otherwise they would hold out a little longer."

Exodus said in June that it had $617 million on the balance sheet and would end the year with $200 million in the bank, enough to keep operating through the end of the year. The bankruptcy procedures won't help the company solve its dilemma of drumming up new business. Many prospective customers have already been scared away by the company's shaky financial situation and loss of top executives, including former CEO Ellen Hancock earlier this month. However, existing customer--such as Royal Caribbean Cruise Lines, ABN Amro, and Best Buy--should breathe a little easier, says Jaffe, now that Exodus is doing something about its enormous debt.