Yipes Reborn – Amid Accusations

Some investors pushed Yipes into bankruptcy in order to snatch more for themselves, charges former exec

July 8, 2002

4 Min Read
Yipes Reborn – Amid Accusations

When Yipes Communications Inc. filed for Chapter 11 on March 21, some folk (including Light Reading) made fun of Jerry Parrick, then the CEO, for saying that bankruptcy would be good for his company and would be temporary (see Yipes Joins Chapter 11 Club).

As things have turned out, Parrick was right. Sort of. Yipes plans to announce tomorrow that it has effectively emerged from Chapter 11 with a healthy balance sheet -- although it isn't quite that simple.

In reality, Yipes Communications' assets have been sold for a song -- somewhere around $20 million, if you include payments for loans while the company was on life support, according to Promod Haque, managing partner of Norwest Venture Partners, one of Yipes' original investors.

The bulk of Yipes' assets -- infrastructure in 10 cities -- was acquired by a company called PHX Holdings Inc., owned by some of Yipes' original investors, including Norwest. This has now been renamed Yipes Enterprise Services Inc. and has received a $54 million new round of funding from its shareholders.

Not everyone is happy about the deal. That's because shareholders in the original company that didn't participate in the rescue plan lost everything. This includes a number of investment funds as well as two of Yipes' founders -- Parrick and Ron Young, both of whom have left the company.

Parrick was tight-lipped when he talked to Light Reading today. Filing for bankruptcy protection "did what we said it would do," he said.

Young, on the other hand, says he's happy that Yipes has pulled out of bankruptcy but says there was no need to file for Chapter 11 in the first place. Yipes' revenue was growing at between 8 and 10 percent a month, and the company had already raised $57.5 million in an escrow account that could have been used to keep the company afloat. Instead, some of the big investors deliberately pushed Yipes into bankruptcy to gain a bigger share of the company for themselves. "I was completely against it," he says, adding that he left Yipes to join Procket Networks Inc. on the day the decision was made.

"I think all these [Chapter 11 filings] are scandalous," Young adds.

"It's easy for people not writing big checks," counters Norwest Ventures' Haque. "We had to write off $55 million."

What's happened to Yipes is "pretty unique", says Haque, who thinks it could set a precedent. "We're just seeing the beginning. There are a lot of Internet companies out there that have been encumbered by poor balance sheet management in the past. If you can clean up those balance sheets -- and you can only do that in a bankruptcy court -- their business models look even more attractive" than they did originally.

Haque views Metromedia Fiber Network Inc.(MFN) (Nasdaq: MFNX) as another service provider that might follow Yipes out of Chapter 11.

Yipes has certainly emerged a lot leaner and meaner from the bankruptcy court. "The company was formed right at the peak of the Internet boom," notes Dennis Muse, who joined Yipes as COO last January and became CEO when it filed for Chapter 11. As a result, it ended up like a lot of other startups, with a "cost structure that was out of whack" with market conditions.

Yipes has managed to renegotiate a lot of supply contracts, often achieving more than a 50 percent reduction in costs, by holding out the prospect of it going bust and suppliers getting nothing. "We've been successful in renegotiating contracts across all our lines of business," says Muse.

Muse has also slashed staff numbers. He expects to have between 112 and 120 by the end of this year, less than a third of the 375 that Yipes once employed, in early summer 2001.

Surprisingly, Yipes has lost a mere 4 percent in revenues since it filed for Chapter 11, according to Muse. And customer satisfaction levels have improved, he adds.

Investment in the new Yipes comes from Norwest and a bunch of other existing shareholders including New Enterprise Associates (NEA), Sprout Group, J.P. Morgan Chase Bank & Co., Soros Private Equity Partners, Focus Capital, Glynn Ventures, and Quantum Capital.

— Peter Heywood, Founding Editor, Light Reading

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