A Fat Wallet at a Fire Sale


By Peter Elstrom Back in December, Howard Jonas, a furious dealmaker who founded telecom player IDT, pulled off a doozy. He bought the assets of Winstar Communications out of bankruptcy for $42.5 million -- less than 1% of the $5 billion the wireless telecom upstart had spent on its state-of-the-art routers, fiber-optic cables, and other gear. What's more, Jonas convinced U.S. Judge Joseph Farnan Jr. to force Winstar's suppliers to keep providing him with goods and services even if he didn't pay any of Winstar's old bills. "This might not top the Dutch settlers buying the island of Manhattan for $24, but it comes pretty close," said Jonas when the deal closed on Dec. 20.

That's just one of several eye-opening deals Jonas has cut in recent months. In October, IDT bought back control of Net2Phone, which develops technology to allow phone calls over the Internet, for less than $100 million. Never mind that Jonas had sold control of the company to AT&T for $1.1 billion a year earlier. In November, IDT purchased Talk America Radio Networks, a leading producer of talk-radio programming. On Feb. 6, Jonas closed a deal for Horizon Global Trading, which makes software for bond traders. And now Jonas has opened preliminary discussions with bankrupt telecom player Global Crossing about acquiring some of that company's U.S. assets.

PENNIES ON THE DOLLAR. As the telecom industry melts down and other execs moan about the tough economy, it's not hard to see that Jonas is having a ball. And why not? He's a born bargain-hunter with a fat wallet at the fire sale of the century. With $1 billion in cash on its balance sheet and a mere $50 million in long-term debt, Newark (N.J.)-based IDT is poring over troubled or bankrupt companies to figure out what it wants to buy for pennies on the dollar.

Considering all its acquisitions, analysts figure IDT's revenues, which increased 13% last year, to $1.2 billion, will rise another 13% this year, to $1.4 billion. That's about twice as fast as the rest of the telecom sector. "He is positioning IDT to become a major player in the telecom industry," says Andrew Sidoti, managing director at investment research firm Wm. Smith & Co.

Exactly what is Jonas building? IDT doesn't look like any other telecom player out there. In fact, it doesn't look like any other company, period. IDT pulls in most of its revenues from telecom services, largely by selling prepaid calling cards to consumers and wholesale capacity to other phone companies. But now it also owns a satellite radio company, radio programming, video broadcasting technology, bond-trading software, and, oh yes, a towing service called 1-800-TOW TRUCK.

A DIME AT A TIME. There's method to Jonas' apparent madness. What he's trying to do is protect the telecom company he founded in 1990 by offering content and services that will enable IDT to escape the brutal price competition that has wracked the industry in recent years. For example, a business in Manhattan may sign up for phone service and Internet access from IDT -- and pay a small price to receive streaming-radio programming or CNBC video. IDT would get additional revenues for its content and, in theory at least, its customers would be less likely to defect to another company offering slightly lower telecom rates.

If the strategy sounds unusual, well, it's just a reflection of Jonas himself. The 45-year-old New Yorker has been a dime-at-a-time entrepreneur his entire life. Even now, he'll say the high point of his business career was the first day he started working for himself, pushing his hot-dog cart around his Bronx neighborhood at 14. "That day, in my mind, I was as rich as a Rockefeller," he wrote in his autobiography, On A Roll, published in 1998 (and available for free at www.howardsbook.com).

After that, he sold flowers on the street, advertised horoscopes through the National Enquirer and other supermarket tabloids, and sold bonsai Christmas trees out of his dorm room at Harvard University. "He's a kind of entrepreneurial Everyman," says Stephen Greenberg, chief executive of Net2Phone, the publicly traded company in which IDT has a controlling stake.

THE LAST MILE. The Winstar acquisition is the key component of this strategy. IDT already had a national and an international network, including capacity on trans-Atlantic and trans-Pacific cables. What it really needed was local networks, known as the "last mile" in telecom parlance, so it wouldn't have to pay Baby Bells like Verizon Communications to connect local calls and Net traffic to his long-distance network.

New York-based Winstar provides that last mile. The company uses cutting-edge wireless technology to provide high-speed Internet and data connections to customers in urban areas. It works like this: Winstar puts an antenna on top of a building in the middle of a city and then puts others, the size of a pizza, on the buildings in which it gets customers. These antennas transmit data to each other at speeds of up to 155 megabits per second, or about 300 times as fast as most broadband connections over cable-television networks or traditional phone lines.

With that kind of speed, IDT can sell local and long-distance voice service, high-speed data and Net connections, and streaming video or audio. "It's a no-brainer to see how this is a benefit," says Alan Kahn, co-director of investments at Kahn Brothers & Co., a New York money-management firm that holds stock in IDT. Winstar collapsed because it took on $5 billion in debt, but it still managed to install its gear in 15,000 buildings around the country. With Winstar's debts wiped out by the bankruptcy proceeding, IDT expects to begin making money from its operations by this summer, according to Sidoti.

11TH-HOUR STRIKE. How Jonas struck the Winstar deal says much about who he is and why he has been successful at IDT. When Winstar filed for Chapter 11 last April, it gave the usual assurances that the filing would have no affect on its business and that it would soon emerge from bankruptcy. But by last fall, with no bidders for its assets, Winstar faced the very real possibility that it would be shut down and liquidated.

Jonas, who had long been interested in Winstar's assets, stepped in at the 11th hour and played to Judge Farnan's concerns that Winstar's customers, including the Justice Dept. and the Securities & Exchange Commission, would lose their service. He bid $42.5 million for the company, which had once been worth $11 billion, and promised to keep it running.

Jonas, who appeared in bankruptcy court in December to make the appeal, wanted one other condition. He asked for an unusual clause requiring all of Winstar's suppliers to keep providing their services as long as Winstar paid its current bills -- with no obligation to pay past bills. The suppliers, including Verizon and telecom player Williams Communications, fought the proposal tooth and nail. Finally, after seven hours of negotiations on Dec. 18, Judge Farnan said he feared the company was doomed. "The judge walked out because of the dispute," says Pauline Morgan, an attorney that represented Winstar in bankruptcy.

SECONDHAND DESKS. The next morning, faced with the prospect of Winstar's liquidation, the suppliers caved. They agreed to Jonas' condition -- allowing IDT's acquisition and Winstar's survival. "The whole case was unusual," says Morgan. "We were running out of money, and we had to get a deal quickly."

Leave it to Jonas to strike a bargain-basement deal. In the office and at home, Jonas is a picture of frugality. He takes pride in the spartan look of IDT's Newark offices, where few desks match because the company typically buys them secondhand. He shares an office with six or seven other executives, which not only saves money but allows him to bounce ideas off of them at any time.

"He loves the input," says one former IDT employee. "He won't set up meetings. He'll just shout across the office." Jonas' one indulgence in the office? He built a pool in the bottom of IDT's building, because he likes to swim laps every day.

"VERY COMFORTABLE." Jonas, whose IDT stake is worth more than $300 million, is hardly ostentatious outside the office, either. He drives a blue Mercury Sable station wagon and typically wears jeans and open-collared shirts to work. Up until three or four years ago, Jonas, his wife, and their eight children lived in a modest three-bedroom house in the Bronx. They finally moved after their house burned down. Now ensconced in more comfortable digs in the Bronx, the Jonases are expecting their ninth child. "With Howard, what you see is what you get," says Net2Phone's Greenberg. "He is very comfortable with himself."

His management approach is much more Bronx streets than Harvard Business School. He runs IDT like an entrepreneur and expects other employees to act the same. Salaries are kept low -- Jonas and his top execs all make around $200,000 -- but many employees get stock or stock options. And Jonas will listen to any business idea, no matter how off the wall. That's how 800-TOW-TRUCK got started.

An IDT employee pitched him the idea of a single phone number that a stranded driver could call from anywhere in the country to get a tow. They batted the idea around for a while and came up with a sort of reverse Automobile Association of America (AAA). Rather than pay an annual membership fee to cover any sort of towing fees, customers call the 800 number and IDT uses its technology to route the call to the closest towing company that has paid IDT to become a member. In contrast to AAA, customers pay only when they use the service. "IDT is a place where men and women with ideas can flourish," says Greenberg.

OUTSIDE THE BOX. And how. Jonas tends to take employees he thinks are bright and put them in positions where they have absolutely no experience. After buying Winstar, Jonas made Charles Garner, an attorney by trade and most recently the head of IDT's venture unit, Winstar's chief executive.

Back in 1996, Jonas tapped a 26-year-old named Geoffrey Rochwarger to run the online service, Genie, that IDT had just bought from General Electric. Rochwarger had been a junior exec helping manage IDT's relationships with Internet service providers and had virtually no management experience, but Jonas thought he was smart. Rochwarger excelled, and the money-losing Genie quickly became profitable. Since then, Jonas has promoted Rochwarger, now all of 31, to oversee IDT's telecom business.

The next few months will determine whether Jonas is able to transform IDT into a true telecom power. With his billion-dollar war chest, he has the cash to pick up many assets from bankrupt players. He has plenty to choose from, including Global Crossing, McLeod USA, and PSINet. Whatever he ends up buying, look for Jonas, the former Bronx hot-dog vendor, to cut a good deal. Elstrom reports on telecom and technology issues for BusinessWeek in New York


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