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Memphis NetWorx: Confusion Still Reigns

Tuesday morning, Councilwoman Barbara Swearengen-Ware offered a resolution (unanimously passed) asking the Tennessee Regulatory Authority not to approve the sale of Memphis Networx, MLGW’s $28-million telecom disaster. The sale is, “premature and not in the public’s interest,” she said.

On Thursday afternoon, as she solicited votes in front of the Greenlaw Community Center, Ware admitted that she didn’t fully understand everything that has transpired regarding Networx’ $11.5-million sale to Communication Infrastructure Investments (CII), a heavily financed holding company based in Boulder, Colorado.

“I’ve never heard of them,” Ware said, when asked what she knew about Zayo Bandwith, a Denver/Louisville-based commercial bandwith company founded by a group of telecom executives including CII founders Dan Caruso and John Scarano. Zayo has recently issued a series of press releases touting its recent acquisition of Memphis Networx.

Earlier this summer, Scarano appeared bewildered when councilwoman Carol Chumney asked if his company was willing to discuss forming a partnership with the city of Memphis. After a few one-liners about never having conducted business in public, he allowed that, if Memphis was ready to take on the financial risks of a venture-capital firm, maybe they could talk.

Chumney looked silly, and a portion of the audience — the middle-aged white guys in suits portion — chuckled at the blond crusader’s naivete. Didn’t she know the city had dragged the private investors into the partnership then bailed when Networx needed more dough? Couldn’t she understand that business is business no matter who the partners are? And it’s not like CII — a company created to manage risk — was a commercial bandwith company like the newly minted Zayo.

Ware says she’s “offended” that CII refuses to cooperate with the City Council by answering questions pertaining to the management and private ownership of Memphis Networx prior to the company’s sale.

Unquestionably, the sale of Networx to CII was a deliberate and successful end-run around the City Council, but the council couldn’t enforce transparency even when MLGW was the majority investor in Networx, so it’s unlikely to gin up any leverage at this late date. And it’s hard to know if Ware’s resolution was anything more than political theatrics on an election eve. At best, it’s an idea that has arrived years late and millions of dollars short.

Zayo is heavily capitalized, with a quarter-billion in venture capital and the full attention of industry analysts, who are beginning to cite Zayo’s immense capitalization as further proof that the great telecom revival has arrived. And Zayo’s “we-got-it-come-and-get-it” attitude suggests that attorneys will be unleashed if any roadblocks are thrown up by the council or the TRA. The company’s press materials state that while some of the company’s fiber acquisitions are still pending regulatory approval, Networx is owned outright by Zayo.

It’s a big pill to swallow, but Networx is probably gone. And all suggestions of a public fleecing aside, if there wasn’t a question of partial public ownership, the company’s sale would have been covered in its entirety in a two-inch column on page three of The Commercial Appeal‘s business section. It would be over and forgotten by now because, all value judgments aside, in business these things happen every day.

When asked if a bidding process that even MLGW’s board of governors described as “flawed” could be considered relative to approving the sale of Memphis Networx, a TRA spokesperson was vague to the point of being unquotable.

And what would happen if Networx’ sale to CII/Zayo was somehow reversed? Even in the midst of what appears to be a telecom comeback, its unlikely that the city will find a buyer actually willing to fork out more money for some holding company’s sloppy seconds.

And if Memphis decided to go it alone in the telecom biz, ratepayers and/or taxpayers would be called on once again to pony up millions (if not tens of millions) to effectively reboot the entire system and get new and necessary building projects underway.

Two weeks prior to his third-place finish in Memphis’ mayoral race, former MLGW president Herman Morris admitted he was too ambitious in his decision to create Memphis Networx as a public/private partnership.

“It’s not that it can’t work,” he said. “But it didn’t work here.”

Even with a new City Council on the horizon, there’s still no reason to believe that it can work here. If Networx executives and private investors have been secretive, our civic leaders have shown a bizarre and counterproductive unwillingness to understand the telecom industry they waded into. Now, like an orphaned baby, they curl up next to the sock monkey of their resolutions, unable to understand that they are alone and adrift, with no easy excuses or answers.

Should the council continue to seek closure and gain a better understanding of what went wrong with Memphis Networx? Absolutely. And an investigation into MLGW might be a good place to start. But its probably delusional to think that reclaiming Memphis Networx would be anything short of disastrous. The only thing dumber than starting the telecom was selling it. Taking it back would be a trifecta of what the insane Captain Queeg called geometric logic.

On Tuesday, City Council attorney Allan Wade pointed out that Networx owes the City nearly $500,000 in unpaid fees. That bill should probably be sent, not to Networx or CII but to Zayo, along with a note asking about leveraging the old debt against a tiny piece of the action.

— Chris Davis

Read more about Networx.

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Cover Feature News

It’s Now or Never for Networx

CREDIT: Richard Thompson

Who made the best bid for Memphis Networx? Was it the well-funded seven-month-old holding company from Colorado — Communications Infrastructure Investments (CII)? What about New York’s proven infrastructure firm American Fiber Systems (AFS)? Or was it BTi Corporate (BTi), the darkhorse candidate that wants to turn Memphis into the bio-tech research hub of the Americas?

MLGW’s board says CII won the bid fair and square. The other bidders say the fix was in from day one.

It might be helpful for the City Council to hear all three companies explain why they think they made the best bid. But given the long, strange saga of Memphis Networx, such an occasion might distract from the unspoken question that loomed like a family curse over last Thursday’s vote by the MLGW board to sell Networx for a cash return on its $29 million investment of just $994,000: Namely, how in the world did Memphis Networx become lodged so inextricably between the frying pan and the fire?

Networx representatives made the case that delaying the company’s sale any longer will send it into a tailspin of irreversible loss. “It’s now or never” has been a reoccurring theme in the Networx debate. But when “now” is a paltry return of $994,000, “never” isn’t much of a threat.

The MLGW board meeting did reveal several apparent flaws in the bidding process. A presentation delivered by the McLean Group — the consulting firm hired to assist Networx through the sale — may have done more damage to the credibility of the consultants’ ultimate findings than anything brought to the podium by angry representatives of AFS and BTi.

McLean Group chairman Dennis Roberts and junior consultant Tom Swanson made the losing bidders sound so bad it became impossible to imagine how such nonserious bidders could have made it to the final three in the first place.

As the deal was explained to the media by Nick Clark — who sits on the boards of both MLGW and Memphis Networx — the bidding process was managed quietly through the McLean Group to weed out frivolous bidders and to avoid conflicts of interest. In a sneering assault on BTi’s credibility, one McLean Group consultant announced that a BTi principal had been making his living installing stereo equipment. (BTi founder and CEO Paul Allen has since stated that nobody in his telecom company has ever installed stereo equipment.)

The McLean consultants also said Allen’s company didn’t follow the rules and that its bank letters were unconvincing. They said BTi representatives didn’t show up for a scheduled due diligence meeting. (BTi has given the Flyer a letter from Thomas Murray of Fifth Third Bank reconfirming its interest in financing the Networx purchase based on a thorough process of due diligence.)

AFS’ problem, as identified by the McLean Group, was basically that they couldn’t show anybody the money. AFS has filed a declaratory action suit to prove their seriousness.

No BTi representatives were present when McLean consultants trashed their company’s bid, but AFS CEO Dave Rusin was visibly disturbed by the McLean Group’s findings. He shook with anger at times while explaining in measured words how his company survived the dot-com crash in 1999, weathered the telecom meltdown of 2001, and is a serious and reputable company.

He convincingly answered charges that his company wasn’t good for the cash by asking what was wrong with the $60 billion available to AFS’ historically cooperative financiers: Sierra Venture Partners, Lucent Venture Partners, North Atlantic Capital, and Hamilton Lane.

Dave Danchak, AFS senior vice president of corporate development, angrily said that the McLean Group’s figures didn’t look like anything he’d ever seen before.

Germantown resident David McCabe, a representative of BTi Corporate, arrived for the second half of the marathon meeting.

“They’re hiding something,” he insisted, accusing the McLean Group of spinning the facts.

McCabe also challenged the McLean Group’s assertion that BTi missed its due diligence meeting. He said that Networx representatives called unexpectedly on a Wednesday afternoon and asked if BTi could assemble its team and be in Memphis the next morning. According to McCabe, doubts were expressed on the front end as to whether or not his people could make it on such short notice, but they said that they would be in Memphis as soon as possible.

McLean consultant Swanson admitted that the due diligence process had been “accelerated,” a fact conveniently left out of the McLean Group’s original narrative, which alleged that the stereo-installing bunglers of BTi just couldn’t follow the rules. “Their story keeps changing,” McCabe declared.

After listening to McCabe’s indignant rebuttal of the McLean’s Group’s analysis, the MLGW board concluded that the McLean Group and BTi had had “a miscommunication.”

Although Rusin and Danchak of AFS had initially refused to comment on BTi’s proposal, the AFS reps returned to the podium and expressed sympathy for their competitor.

“Mr. McCabe talks about how the story keeps changing,” Rusin said. “Well, guess what? We come here today and find that the numbers have changed.”

Rusin and Danchak then unveiled their company’s lawsuit. MLGW board chairman Rick Masson expressed concern that the suit was part of an intentional ploy to further devalue Networx, which has only enough operating capital to survive for a month to 45 days.

CEO Dan Platko then delivered a grim assessment of Networx’ financial condition, and Clark described what might happen if the sale was delayed. Staff cuts would be necessary, he said, service would then decline, and customers would flee. According to Platko and Clark, it was doomsday eve for Networx, and the clock was ticking.

In spite of potential conflicts of interest, Clark maneuvered back and forth between his dual roles as MLGW governor and Networx board member. He spoke of the need for a transparent process and occasionally played the role of devil’s advocate, despite the fact that the Networx board had approved the sale to CII and had signed a binding agreement with the company.

Clark cited a Flyer story and asked a series of questions supposedly based on this newspaper’s ongoing coverage of the Networx sale. But Clark’s Flyer-based line of questioning left out the same embarrassing facts about possible conflicts of interest that were raised in the article that he’d omitted in a previous report to City Council chairman Tom Marshall.

After confirming that Platko had once been employed by Intira, a company co-founded by former Networx CEO Mark Ivie, Clark moved to another subject, without mentioning the fact that Swanson — the McLean Group’s allegedly unbiased third party — had also been a vice president at Intira. Nor did Clark mention that Swanson, prior to assuming his McLean Group duties, may have accepted a lucrative, paid consulting gig with Networx via his personal firm, TJSwansonCo.

After Clark’s omissions were noted, Platko and Swanson admitted that they’d worked together at Intira. Swanson later said that prior to the Networx deal, he and Platko hadn’t done business together since leaving Intira. However, a contract signed by Platko on October 5, 2006, suggests that Networx’ chief executive offered Swanson $2,000 a day for consulting with Networx’ sales division, a month before the McLean Group was called in to assist in Networx’ eventual sale.

The information becomes doubly troubling in light of Networx officials’ repeated failure to identify Swanson as having any duties above and beyond the work he was doing through the McLean Group. (Detailed questions submitted by the Flyer to Swanson and Platko have yet to be answered.)

“It was an imperfect process, but it’s an imperfect world.” This, more or less, was the opinion MLGW board members unanimously expressed prior to finally signing off on the sale of Networx to CII.

In a two-to-one vote with one abstention, the board passed a resolution to go forward with the sale of Memphis Networx to CII. In light of AFS’ lawsuit and mounting concerns within the City Council, it’s unclear what that resolution ultimately means.

Documents dating from 2004 show that Networx executives and at least one board member were actively negotiating to sell Memphis Networx to AFS in an unpublicized all-stock deal.

Although sources conflict on the details, it appears that Networx officials’ enthusiasm for closing the original deal may have faded when it was discovered that the offer would be small and paid in stocks, especially in light of the fact that MLGW, as a publicly held company, is prohibited from owning stock in a private company.

When asked last Thursday, Networx board member Andrew Seamons said it was highly unlikely that any of the private investors would have an interest in absorbing the AFS stock into their share of the sale. Seamons is professionally affiliated with Pitt Hyde’s Pittco investments. Hyde, who recently stepped down from his position as AutoZone chairman, is one of the original private investors in Memphis Networx.

Over the weekend, one highly placed proponent of the Networx sale to CII circulated news items intended to prove BTi was in over its head on the Networx deal.

Considering the board’s vote to sell Networx to CII, it’s hard to imagine what anyone stands to gain by further discrediting BTi. Unless it’s the fact that continuing the debate over who placed the best bid shifts focus away from the only questions that matter: When did Networx’ executives know the company was in a tailspin; and how were the company’s finances managed from that point on?

If the McLean Group was contacted to assist with the sale of Networx in December, as reported, serious concern over the company’s finances had to be growing by the time Platko offered Swanson $2,000 a day for services that have yet to be sufficiently explained.

Networx’ history of questionable decision-making ranges from disastrous technology purchases to a miscalculated deal with ServiceMaster that cost the telecom thousands of dollars a month for nearly a year. How did that history change when new CEO Platko found out that his company was in serious trouble? Did he tighten up the company’s belt or did he enable spending that further exacerbated Networx’ dire situation?

Platko and his predecessors had the advantage of using Networx’ private status to withhold information whenever anyone attempted to delve too deeply into the specifics of the company’s spending practices. The choice Networx executives have given its public owners — nothing or next to nothing — demands answers not available in the financial postmortems Clark has delivered to the press.

Epilogue: When Platko replaced his former colleague Mark Ivie as head of Memphis Networx in 2006, MLGW’s ratepayer/owners were not notified of the change. Clark, an appointed steward of the public’s interest in Networx, has described the lack of attention given to such changes at a company funded (in part) by public dollars as “fortunate.” To interpret his comment as “the less the public knows about what’s being done with its money, the better” may be unfair, but it’s also unavoidable.

Clark says he recognized that Networx was experiencing trouble when he joined the board in 2005. Ironically, given the final outcome, he says he kept quiet for fear of scaring off potential customers.

MLGW has fully enabled this disaster. Its board members have harbored concerns about Networx’ financial well-being for at least two years but allowed Networx to keep a low profile while the telecom was clearly wasting away. Silence and complicity in the name of maintaining Networx’ “competitive edge” precipitated MLGW’s recent “damned if you do, damned if you don’t” decision, wherein the only thing worse than selling its valuable telecom asset for a $28 million loss is not selling it right now … for a $28 million loss.

On Tuesday the Memphis City Council voted to discuss Networx-related issues at a meeting of the MLGW committee. Details of that committee meeting were not available at press time.

See MemphisFlyer.com for updates on the Networx story.

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Cover Feature News

Unplugged

Talk about your bitter ironies. Days after MLGW announced that it would eat a multimillion-dollar loss and sell its 49 percent share in the public/private telecom venture Memphis Networx, subscribers to Business Week were reading all about the telecom industry’s triumphant comeback.

The magazine’s cover story — “Telecom: Back from the Dead” — cited a growing body of research indicating that investments in high-speed communications play a more vital role in “stimulating economic growth and productivity” than money spent on “roads, electricity, or even education.” If all of this is true, how can MLGW even consider dumping its $29 million investment in Networx for the paltry sum of $994,000?

At least part of the answer can be found in the third paragraph of the story, in which Business Week cites the example of a video clip being uploaded in New Jersey. The video exits Google by way of Level 3 Communications’ 47,000-mile fiber-optic network, is then “handed off” to a “new fiber loop” run by Verizon, and “milliseconds later,” the video is showing in an apartment in New Brunswick. What does any of this have to do with Networx? Plenty.

Communications Infrastructure Investments (CII), the Colorado-based holding company that’s trying to buy Memphis Networx for $11.5 million, was founded by Dan Caruso, a founding executive of Level 3 Communications. Caruso is also the former CEO of ICG Communications, which Level 3 bought out in 2006, adding 2,000 miles of fiber in Colorado and the Ohio Valley to its already substantial holdings.

ICG’s backers — Columbia Capital and M/C Venture Partners — picked up $30 million in cash on the deal and $127 million in Level 3 stock. Columbia Capital and M/C Venture are two of the five venture-capital groups backing Networx’ potential buyer, Communications Infrastructure Investments.

The bottom line? Big venture-capital money is being invested in telecoms again. And it seems likely that Memphis Networx fiber-optic cable is destined to become just another piece of the increasingly valuable conduit for moving YouTube clips of bathtub farts and nipple slips from Google central to your computer.

If you build it …

In the film Field of Dreams, Iowa farmer Ray Kinsella (played by Kevin Costner) was told famously, “If you build it, they will come.” The analogy isn’t exact, but Memphis Networx built a broadband fiber network for Memphis, ran out of money, and now “they” — in the form of venture-capital communications companies — are coming.

It’s important to understand that the telecom failures of 2001 — the year Memphis Networx became operational — represent the largest industry crash since the Great Depression. The spectacular decline has been blamed, in part, on overaggressive investment in expensive infrastructure. And now, holding companies like CII and American Fiber Systems can acquire and resell ready-made infrastructure systems and customer bases of companies like Networx for a fraction of the build-out and maintenance cost.

“It’s interesting to me that [Networx] is where it is,” says Herman Morris, the soft-spoken mayoral candidate who served as president of MLGW when Networx was created. “It’s an asset that’s been built out with 50 or 60 years of life left in it, and probably less than 10 and certainly less than 20 percent of that asset is being used.”

Morris asserts that in spite of Networx’ failure to turn a quick profit for its private investors, the company has already achieved its primary goal, which was to improve Memphis’ communications infrastructure by building an underground loop of high-speed fiber.

“When we got the loop, it took us from a third- or fourth-tier city in terms of infrastructure to a tier-two,” Morris says. “We’re not New York, clearly … but we were doing what we needed to do in terms of building an attractive component for businesses looking to relocate or expand here. It’s kind of like building out an airport so FedEx can expand its operations. And it was important that we weren’t the last city with an infrastructure that would serve the high-tech sector in the 21st century.”

Morris describes Networx’ public/private partnership as “a marriage of convenience” and says he knew on the front end there would eventually be a “divorce.” “Venture capitalists are high-risk investors,” Morris says. “They want big fluctuations [in market value], and they want to catch [the market] on a high. We were kind of like savings-bond investors. When you’re investing for 50 years, the investment doesn’t have to kick out more than 1 or 2 percent a year. That’s a good steady return, and stability is important.”

The big payoffs in this kind of investment, Morris notes, aren’t necessarily measured on a spreadsheet listing Networx’ profits and losses.

“When [a business] relocates to or expands its operations in Memphis, [MLGW] gets more revenue from old infrastructure,” Morris says. “From the wires, the pipes, and the gas.

“It’s not just that a company comes to town and folks get jobs and all that good stuff. The utility company now has a customer that instead of having a 200-square-foot operation has a 20,000-square-foot operation or a 200,000-square-foot operation. And that operation is filled with computers and air conditioners and all the things it takes to run a business. It’s not exactly a self-feeding system, but there is a lot of synergy.”

The wisdom of Morris’ decision to launch a telecom venture at a time when every market analyst was predicting a crash is debatable. But in spite of a marketplace burned by everything ending with “com,” Networx survived and grew at a reported rate that was at or above anticipated levels. The company showed a miniscule profit for the business cycle ending in 2005 and seemed to be on its way to making the 1 to 2 percent return that would have made Morris happy.

Small, slow profits, however, are less meaningful to the private investors who assumed a majority stake in Networx in 2005, when the City Council turned down MLGW president Joseph Lee’s proposal to secure a $6 million loan and prevent MLGW from losing its superior equity status in Networx. Now Networx is on the auction block, and Memphis is positioned to lose big in what appears to be a winning field.

City Council Concerns

Last week, MLGW’s board decided to remove the vote to approve Networx’ sale from Thursday’s board agenda. The decision was made to satisfy concerns raised by the City Council, particularly that the $11.5 million offer made by Communications Infrastructure Investments was not the highest bid. According to MLGW commissioner and Networx board member Nick Clark, the delay is risky but shouldn’t impact the deal.

The council’s concerns come in light of a odd arrangement between Networx and CII: that Networx’ sale price will drop by $1 million if the Memphis City Council gets too deeply involved in the process. And although he agreed to provide the council with requested information about the top companies bidding for Networx, Clark offered words of caution:

“It’s like when you’re selling a house,” he said. Tipping your hand on the low bids might give the winning bidder second thoughts about the asking price.

The council’s stepped-up interest in the Networx sale comes in the wake of last Tuesday’s news that American Fiber Systems (AFS) of Rochester, New York, claimed to have offered a bid for Networx valued at $13.5 million. And it was recently revealed that another company submitted a bid valued at $20 million.

Clark was mildly dismissive of the council’s concern, noting that the AFS offer included stock. He drew a round of knowing laughter from observers by comparing AFS’ stock options to promises made by Memphis’ all-purpose bogeyman Sidney Schlenker, the smooth-talking chiseler from Denver who sold Memphis on The Pyramid, a rideless theme park on Mud Island, and, predating a memorable episode of The Simpsons, a monorail.

But, Clark’s dismissiveness aside, the venture firms behind CII were quite pleased to receive $36 million and $127 million in stock when Level 3 bought Caruso’s ICG. The Rocky Mountain News reported that the venture capitalists behind CII acquired ICG for $6 million, along with the assumption of $100 million in debt, adding that the firms “stand to profit handsomely from the Level 3 deal.”

Prior to last week’s council meeting, Clark held a digital “press conference,” where traditional media and bloggers such as Richard Thompson of Mediaverse-Memphis were given equal access to e-mail questions.

But Clark’s explanations about how Networx lost so much value in so little time leaned heavily on private business concerns, without explaining MLGW’s failure to control the company’s inexplicable spending or to find a business model that served both the public and private interest.

The Business Model Ate My Homework

There were moments last week when Clark sounded like a CD with a nasty scratch. “The ‘business model’ was failing,” he said repeatedly. “We realized we had to change the business model” … “The business model had to change” … “Changes to the business model weren’t working.” Etc.

Until we understand what Clark means exactly when he references Networx’ various misfired plans, his explanation explains … well, nothing. Meanwhile, the City Council has to mull over a deal they can’t stop, concerning an investment they could never control.

Herman Morris

For eight years, Memphis Networx had a basic pass to operate without media and rate-payer scrutiny. The company kept some rather large decisions under the radar, specifically to avoid the theoretically watchful eye of the City Council. There was no announcement made when original Networx CEO Mark Ivie left the company in 2005. Nor was there any public announcement of Ivie’s replacement, Dan Platko.

Clark has described the tight-lipped approach as “fortunate.” He said the decision not to publicize the departure of Ivie was political in nature, citing “the longstanding concerns [about] Networx’ financial strength,” “the negative press [Networx] tended to receive due to MLGW’s ownership,” and “politics at City Council.” Clark said “the desire was for a simple transition in executive management.”

Clark further explained that Networx made Platko COO because he was already employed in the Networx sales division, and the board didn’t think it was financially in a position to search for or attract a potentially better candidate.

In comments at Mediaverse-Memphis, a blog that parses what local media is and isn’t reporting, Clark claimed that secrecy about Networx’ various misfires and misfortunes was probably in the “best interests” of the ratepayer. If “best interests” means MLGW taking a $29 million bath without any public oversight, he would be correct.

In 2005, Doug Dawson, president of CCG Consulting, studied Networx’ fair-market value, and his determination was grim. According to Dawson’s report, the company was overstaffed, overpaid, and overvalued.

“Wholesale companies in any industry by definition live on slim margins,” he was quoted as saying. “It’s the nature of being wholesale … and Memphis Networx pays about the highest commissions I have ever seen anywhere.”

But Networx wasn’t only secretive about its generous compensation packages and its excessive overhead. The company’s marketing strategy was also a catastrophe — one that did nothing to earn public confidence. It was a partly municipally owned company that ate truckloads of money while doing nothing to woo or wow the public — a recipe for political disaster.

In addition to spending issues, there are also questions about the zeal with which Networx approached some potentially lucrative business relationships.

Conversations with Clark revealed that Networx may have missed out on some big opportunities … or liabilities, depending on whom you ask. Clark confirmed rumors that had circulated throughout 2006, that Networx had been approached by Atlanta-based Internet provider EarthLink concerning a potential build-out and municipal wi-fi deal. This is relevant, particularly if the deal in question was anything like the recent partnership struck between Earthlink and Wireless Philadelphia, a not-for-profit organization committed to making Philadelphia the most wired city in America.

In October 2005, about the time Networx stopped communicating with the public, Earthlink signed on with Wireless Philadelphia to create the largest wireless network in the nation. Shortly thereafter, Earthlink started building a 135-square-mile wi-fi mesh connecting the entire city. Earthlink’s investment in the Philadelphia project has been valued at $15 million to $18 million.

Clark was cagey in his descriptions of how such a deal might have affected the value of Memphis Networx and how it ultimately fell through. He cited various competitors in the wireless market as a potential reason for cold feet on both sides. But Clark’s final concern is somewhat puzzling in light of recent news. According to Clark, there was some concern that if a deal was struck with Earthlink, that company or some other competitor might eventually try to buy Networx.

“The challenge [was whether or not] Networx could control the muni wi-fi system so it could profit, or would an outside entity just attempt to buy Networx on the cheap for the benefit of its fiber ring and not recognize value elsewhere.”

There’s one tiny problem with Clark’s answer: By the time negotiations with Earthlink broke down in 2006, the decision to sell Networx on the cheap was only months, if not weeks away. The decision to hire a private consultant to broker the deal had likely already been made.

Morris says MLGW “planned for the utility to be in the equity superior position and have a super-voice in the decision to continue operations or sell or to accept a new partner.”

Clark says finding private investors who want to answer in any way to a public utility is hard. He has yet to show that Networx ever actually answered to the utility in any meaningful way.

The Deal

There are a number of questions that beg to be asked before this deal goes down. What high-profile investors like Fred Smith and Pitt Hyde made or lost in the deal may turn out to be less important than the value Networx infrastructure may or may not have brought to FedEx and AutoZone at a time when nobody else would build such a network.

From a public utility’s standpoint, Networx’ ability to attract companies like ServiceMaster may reflect a more substantial loss than the $29 million MLGW has invested in the project. These are just some of the things both the media and the City Council need to wrestle with before MLGW’s board puts Networx’ sale to a vote on July 5th.

Perhaps all the suspicious behavior surrounding the sudden anouncement and haste of the Networx sale amounts to nothing more than the death throes of a failing venture struggling to find a quiet exit strategy. But telecoms are back, MLGW is out, and such a spectacular crash couldn’t have come off better if it had been planned.