If there's one thing that feels better than buying back your company from corporate parents you were never crazy about, it's buying it back a month before those corporate parents file for bankruptcy.
So says John J. "Jack" McDonnell Jr., the founder and chief executive officer of Transaction Network Services Inc., a Reston, Va., company that provides the telecommunications backbone for many leading credit card and electronic banking systems.
He founded Transaction Network Services in 1990, vowing to offer a fast and cheap way for transaction information to flow among merchants, third-party processors, and the credit card networks. It got backing from William Melton, the legendary founder of the payment terminal maker Verifone Inc., and went public in 1994.
Its main competitors are telecommunications companies such as Sprint and MCI. Transaction Network Services bought out AT&T's transaction service division in 1998, and its numerous clients include credit card processors and electronic funds transfer companies such as First Data Corp., Paymentech LLC, Pulse EFT Association, and Concord EFS Inc.
In 1999, at the height of the Internet boom, Mr. McDonnell sold Transaction Network Services - which is known as TNS - to PSINet Inc., the highly touted Web network company. Despite PSINet's solid reputation at the time, Mr. McDonnell recalled that he had his misgivings.
"I actually wasn't convinced when I left that all of the synergies that PSINet felt between the two companies" would come to fruition, he said. "I did tell a few people, 'You may not have seen the last of me.' "
In April of 2001 Mr. McDonnell teamed with the investment group GTCR Golder Rauner LLC to buy back TNS from PSINet, which had run into trouble. PSINet filed for Chapter 11 bankruptcy in May.
In a telephone interview last week, Mr. McDonnell said that he had not planned to sell TNS in 1999. "I was quite happy running the company and doing what I was doing," he said. But it was publicly traded at the time, and Mr. McDonnell, 65, said his first responsibility was to shareholders.
PSINet approached TNS "out of the blue," and after one rejected offer Mr. McDonnell and the board of directors accepted a bid of $760 million - half cash, half stock. By the time the deal closed in December 1999, it was worth closer to $900 million because of the rising stock market, he said.
After selling the company, Mr. McDonnell and six TNS colleagues took over PaylinX Corp., which made software for transaction processing. Mr. McDonnell was the chairman and CEO of PaylinX until he sold it to CyberSource Corp. in September 2000.
Now that he has returned to TNS, Mr. McDonnell has brought those six executives back with him. They are Brian Bates, the chief operating officer; Larry Crompton, a senior vice president and general manager, point of services division; Henry Graham, a senior vice president and chief financial officer; Matt Mudd, an executive vice president of operations; Alan Schwartz, a senior vice president and general manager, financial services division; and Mr. McDonnell's son, John McDonnell 3d, a vice president of business development.
PSINet had tried, without success, to integrate the TNS network into its own. It changed the division's name to PSINet Transaction Solutions, and began shipping equipment into 29 countries - a big change from the strategy of slow and deliberate international growth that Mr. McDonnell had employed through the 1990s.
Mr. McDonnell had been constrained by lack of capital, but PSINet, which was for a while the darling of investors, was able to raise cash easily. "Clearly they were a bigger company, and they had showed an ability to raise an enormous amount of money," Mr. McDonnell said. "This was the new economics. They were working by a different set of rules."
Mr. McDonnell was also critical of PSINet's tendency to spend money without due diligence. "You just don't throw equipment into the country and all of a sudden the POS terminals start dialing you up," he said. "I opened up a Paris office before I left in 1999. It took us two years to crack France, and they didn't understand that."
By September of 2000, Mr. McDonnell said, he knew that PSINet was looking to unload some ballast. Wall Street was no longer an open wallet for Internet companies, and by that time PSINet must have figured out that TNS was not its core business. Mr. McDonnell went directly to PSINet's board of directors to try to negotiate a deal.
The board ended up putting out bids, and Mr. McDonnell's investment team was able to buy back his company at the bargain-basement price of $285 million. He changed the name back to Transaction Network Services and curbed a number of PSINet initiatives, pulling out of 28 of the 29 countries - all but Spain - that PSINet attempted to break into.
"The only money we've expended is trying to pull that equipment back to put into countries where we want to use it," Mr. McDonnell said. "Some countries like Brazil, we can't even get the equipment out."
Still, Mr. McDonnell said, the financial picture looks good for TNS - which remains privately held for now - because the expensive equipment PSINet bought for TNS accrued to its benefit. Under Mr. McDonnell's first watch, he said, TNS spent about $9 million a year on capital expenses. Even when it bought out AT&T's transaction access service network in '98, capital expenses only came to between $10 million and $11 million.
By contrast, PSINet, in its year and a half, spent $19 million on equipment, including vastly expanding the network's bandwidth. Historically, the company had raised its bandwidth incrementally to keep pace with demand. PSINet "greatly increased our backbone bandwidth, so for Christmas this year we didn't have to do anything" to keep up with the surge in transactions, Mr. McDonnell said.
PSINet also attempted to refocus TNS' business by creating an e-commerce unit and seeking out more Internet transactions, Mr. McDonnell said. "We disbanded that group when we came in," he said. "They felt there was a huge transaction opportunity on the Internet. They felt they could migrate all of the traffic through and migrate it over to their backbone, eliminating all our network and putting it on their network." But PSINet never succeeded in doing that, he said.
TNS also recently infused new blood into its telecommunications division, which sells transaction services for calling card or Visa and MasterCard charged calls at pay phones. PSINet had neglected that portion of the business, Mr. McDonnell asserted. But he added that the business was declining anyway because cell-phone use has risen so dramatically.
A spokeswoman for PSINet said that no one in the company, which is still in Chapter 11, could discuss the TNS sale. She said most of the people who were involved are gone, including William L. Schrader, PSINet's founder and former CEO.
When PSINet filed for bankruptcy, TNS could have been drawn into the suit, with the transaction being reversed. Depending on the deal, a bankruptcy court can look back at a company's transactions for the past 180 days prior to a filing. But "our deal with them was blessed by the bankruptcy court," Mr. McDonnell said. "We are now free and clear of any potential legal overhang."
Paul Martaus, the president of Martaus & Associates, a Mountainhome, Ark., electronic payments consultancy, said TNS is in a niche market: it specializes "in the transporting of the transaction, not the authorization or settlement of it."
The key to the service "is to be able to calculate and project exactly what the bandwidth requirements will be at a specific point in time in the future," Mr. Martaus said. "That's where PSINet fell down, more than likely. They thought they would be able to provide that bandwidth at a specific price and probably couldn't."
Mr. McDonnell, on the other hand, "does it real fast, real cheap and real accurate," Mr. Martaus said.
Mr. McDonnell said reacquiring his old company was like getting "the Maserati back. We had to hammer a few dents out, but the engine was running just great."
