news National broadband provider iiNet this afternoon announced it had completed its $105 million buyout of rival Internode, a month ahead of schedule.

The pair announced their nuptials in late December just days before Christmas, in a deal which will add some 190,000 broadband subscribers and some 260,000 active services to iiNet’s already extensive customer base, vaulting the company into clear second place in Australia’s ADSL broadband market, ahead of Optus. The deal also extends iiNet’s current ADSL infrastructure and will see Internode managing director Simon Hackett (pictured) become a major iiNet shareholders.

This afternoon iiNet said completion of the deal was subject to “a number of administrative conditions”, which had now been satisfied. “Thanks to the leadership of Internode managing director Simon Hackett and his team, the transaction has been well received by Internode staff and customers,” said iiNet chief executive Michael Malone.

“Internode is an attractive acquisition, consistent with our strategy of building scale in anticipation of the National Broadband Network. Internode’s experienced management team and excellent customer satisfaction record will allow iiNet to efficiently grow its presence in the South Australian and Eastern State markets.” Separately, iiNet noted that it had issued in excess of 12 million shares to Hackett, meaning the Internode chief will own some 7.5 percent of iiNet.

In a post on broadband forum Whirlpool this afternoon, Hackett noted that the transaction had been completed, stating that the two companies had “overachieved” in a good way in the process.
Hackett emphasised that the company remained a separate business unit from iiNet’s retail operation — any customers looking to churn between the pair would do so at “arm’s length”. He wasn’t sure whether that would change in the future, with a “loooong list” of action items currently being discussed between the two companies as the integration progresses.

“This is the end of the beginning, and we are looking forward to doing lots of great stuff together from now on,” the executive added. “So now – onward and upward :)”

Image credit: Internode

update: Since this article was published, Telstra has clarified that the comments published below were originally published by the Financial Review and distributed to staff as a daily email summary of media commentary. It appears that a Telstra staff member removed the AFR attribution and published the statement on Telstra’s internal intranet; it appeared to staff that it was a statement from Telstra itself.

news Telstra has issued a newsletter to its retail staff informing them that iiNet’s buyout of Internode could see TPG vaulted into clear third place in Australia’s broadband market, following a possible buyout of iiNet by TPG.

Over the closing months of last year, TPG bought about 7.24 percent of iiNet, in a move which many in Australia’s telecommunications sector could be the first step to an eventual acquisition bid. At the time, TPG said it had “no specific intention regarding iiNet” other than to own the shares as “a strategic investment”.

Speculation about the future of the industry as a competitive sector intensified when iiNet unexpectedly announced just before Christmas last year that it would buy long-term rival Internode, with Internode founder Simon Hackett to end up owning a similar percentage of iiNet as TPG when the transaction completes early this year.

However, in an update to staff issued yesterday under the ‘industry news’ banner and seen by Delimiter, Telstra appeared to state that it believed a TPG acquisition of iiNet was likely. “iiNet’s $105 million acquisition of Internode, announced just prior to Christmas, will see it gain 190,000 subscribers, and spearhead TPG Telecom into third place among broadband providers behind Telstra and Optus,” the company’s update read. “In recent months, TPG Telecom has been building a stake in iiNet, which, according to market speculation, could be a precursor to a full takeover.”

It’s possible that the mention in Telstra’s newsletter of TPG Telecom leaping into third place could be a typo — with the iiNet acquisition of Internode actually more likely to leap iiNet into third place in the broadband sector. A TPG acquisition of iiNet would likely lead TPG to being the second-largest player in Australia’s broadband sector, ahead of SingTel Optus.

If an acquisition of iiNet by TPG did occur, it would see Australia’s telecommunications sector drastically consolidated in the arena of fixed-line broadband into just three major players — current incumbents Telstra and Optus as well as TPG. Other rivals such as Primus and Dodo currently have a reduced market share compared with the existing top four players.

Any move by TPG on iiNet would likely be viewed by iiNet’s board as a hostile takeover attempt. The two ISPs have radically different corporate cultures and market approaches, with iiNet being viewed as a very open and friendly company which tends to target mid-level broadband consumers with premium customer service and a quality broadband network, and TPG having a more cut-throat internal corporate culture and a market focus which sees it positioned as one of Australia’s discount kings of broadband.

The chief executive of iiNet, Michael Malone, has said a public inquiry would need to be held if TPG decided to extend its stake in his company to the point where an acquisition was on the cards — and the issue could become a policy question to be decided by the Federal Government.

If TPG were to make an offer for iiNet, Malone said, such a deal would be on the threshold where the Australian Competition and Consumer Commission would be interested in examining impacts on competition arising from the deal.

news Internode managing director Simon Hackett has strongly defended the pre-Christmas deal in which rival iiNet bought out his company Internode, stressing the strength and duration of his long-term relationship with iiNet’s management team in two outspoken forum posts published last week.

The transaction is expected to be completed by 29 February, 2012. Following the acquisition, Internode will trade as a separate business unit and Hackett will continue as the managing director with his existing team, although he will also hold approximately 7.5 percent of iiNet’s shares, making him one of the company’s major shareholders. Hackett has acknowledged that the Internode sellout to iiNet was partly triggered by Internode’s inability to gain enough scale to compete in a National Broadband Network (NBN) world.

Some online critics had speculated that Hackett would shortly take a seat on the iiNet board, despite Malone saying that Hackett would join the iiNet board only after relinquishing his executive responsibilities with Internode. “It’s just a little crazy to have me reporting to Michael Malone and the board and also being on the same board at the same time,” Hackett wrote on Whirlpool in response last week.

“Meanwhile you seem to be framing this as me turning into an inflexibly driven supplicant of Michael Malone, and that framing indicates that you completely fail to appreciate how business works at this sort of high level. It’s a relationship based on trust, not one based on my being a mindless puppet.”

Hackett said that he wasn’t finished with his current goals of finding new ways to drive interesting new strategic outcomes for Internode and its staff and customers. Referring to a potential future position on the iiNet board, Hackett said that it would definitely make him a key decision-maker in the company group.

Hackett expressed his frustration over forum commenters implying that everything he said since the announcement of the buyout was suspect: “So I make a business decision and now I’ve turned into a professional liar? I find that pretty insulting.” He also appeared angry about statements concerning Internode’s customer base being part of the assets he’d sold to iiNet and the possibility that Hackett and Malone would lie to the Internode customer base.

In response to a comment that the announcement of the deal gave no concrete information about the future of the company group, Hackett pointed out that the transaction was still incomplete. He called the board members of iiNet and Malone himself “very smart people who I enjoy working with.” He also directed commenters to the Internode blog for significant information. He termed the deal as an exercise in combining the strengths of two major companies in the market which would in turn, combine the strengths of the leaders of the two companies. “It’s exciting, and it’s got a lot of positive potential as a result. Will it all be perfect? Obviously not,” Hackett said.

Hackett also responded to a statement that Internode’s customers had always paid extra for a higher quality service which was alien to iiNet, providing statistics to indicate actual customer opinion.

Reacting to a suggestion that he would face pressure to make changes to Internode, Hackett said: “You may not appreciate how little respect for my own skills and abilities, or that of my large and capable staff, the above implies.” Hackett also emphasised upcoming positive changes, sarcastically saying, “You don’t seem to consider the potential that some of these unspecified changes forced upon the small and impressionable Mr Hackett by the big bad Michael Malone and his board might be good things. Internode does not begin and end with me.”

The Internode chief quoted examples such as “thriving as a national NBN leader, having the largest direct DSLAM footprint in Australia, and remaining in the marketplace as a sustainable and capable innovator instead of being slowly choked to death in a saturated market by larger players … these are things that don’t seem like bad things, at face value, to me at least!”

Following his statements, the executive signed off from Whirlpool by asking that commenters refrain from framing conspiracy theories. “I will now stop responding to your posts on this topic now because they’re solidly circular in their nature (as, by extension, are my replies to it),” he said.

Image credit: J. D. Hancock, Creative Commons

opinion Reality check: Simon Hackett didn’t sell Internode because of the National Broadband Network. He didn’t sell it to cash out. And he certainly didn’t sell it to take Internode to the next stage of its development. He sold it because one man — no matter how strong — can only hold up a visionary ideal for so long, and twenty years of doing so is more than enough.

In Haruki Murakami‘s recently published novel 1Q84, one of the leading characters refers to a famous literary technique employed by the Russian physician and author Anton Chekhov. “According to Chekhov, once a gun appears in a story, it has to be fired,” the character tells another. “Meaning, don’t bring unnecessary props into a story. If a pistol appears, it has to be fired at some point. Chekhov liked to write stories that did away with all useless ornamentation.”

In short, as a symbol of violence and death, a gun is such a potent image that an author shouldn’t introduce it into a story unless it will eventually be used. The very presence of a gun implies that it will be taken up and fired. It’s not an object so much as the visual representation of an inevitability. A similar concept appears in the writings of American author Don DeLillo, who famously had one character warn another that all conspiracies or plots tended towards a single endgame: death. Someone must eventually die as the fulfilment of any conspiracy, DeLillo suggested; the gun must be fired once it is known to exist.

Faithful to this ideal, Murakami’s character in 1Q84 does introduce a gun into the story; one which becomes a central plot element. I haven’t finished the book yet; but I can already sense where things are going. It’s a one way street.

In the days before Christmas, it’s not hard to imagine that much of Australia’s telecommunications industry must have felt themselves to be wandering around in a Murakami novel; distanced from their emotions, with a confusing world vaguely swirling around them; unsure what to feel about iiNet’s sudden and unexpected announcement that it would buy its long-time rival Internode.

An iiNet buyout of Internode had been speculated about for so long that when the news actually arrived, it did so in the sort of surreal atmosphere with which Murakami is famous for. iiNet founder Michael Malone and his counterpart at Internode, Simon Hackett, have such large personalities; everything they do and say is virtually the stuff of industry legend. To hear them on the same teleconference promoting the marriage of their companies felt like your parents taking you aside and announcing that they were to be separated. You weren’t quite sure what it all meant; all you knew was that your world had irrevocably changed.

On the conference call, neither could really explain why the buyout had occurred. There were plenty of facts, figures, EBITDA ratios, customer numbers, strategies and plans. But underpinning all of it was a confusion that left most onlookers out of sync with reality. Wasn’t it only one month ago that Malone had publicly called for Hackett to “cash out” of his company? What had changed? Why was Hackett selling? What made now the right time? Nobody seemed to know.

The reaction from Internode customers was instant and clear. Although it was mostly expressed online, at the time I visualised many of them raising their heads and hands to sky and crying: “Noooo!” iiNet was a good company, many of them seemed to feel, but Internode has always represented something more. Something they cared strongly about.

There is no doubt that this feeling revolves around and stems from the fact that Simon Hackett has never been a ‘normal’ executive or entrepreneur in the usual sense of the word.

Where executive like Malone have followed a path of rapid expansion through constant acquisition, Hackett has preferred to quietly and steadily build Internode’s customer base through the constant development of its network infrastructure. Where companies like TPG have blanketed Australia with massive and misleading marketing campaigns, Internode has virtually relied on word of mouth alone. Where many of Australia’s ISPs have gone public and made their founder instant multi-millionaires, Internode has remained independent and almost 100 percent in the hands of Hackett himself.

Where some ISPs have cooperated to a certain extent with the big bad, Telstra, Internode has waged a war against the nation’s biggest telco that has now lasted several decades and has seen no quarter or mercy given. Where almost every ISP holds back some information from its customers, sometimes for their own good, Internode has been unflinchingly, brutally honest in its dealings constantly. Rarely do you wonder where Internode sits on a certain position. Internode does not deal in shades of grey — only black and white.

Hackett’s naked honesty in places such as Whirlpool has become the stuff of legend. His blog posts on Internode’s own blog have exhaustively disclosed how the company is serving its customers, including fine details of its financial model. And his rare industry speeches are always packed houses as those attending await to hear how one of the only true ‘outlaws’ left in the sector sees the ISP industry of today — and what he will do next.

And yet, Internode has not been a perfect company in the capitalistic sense over the years.

Hackett’s ongoing and very public war with Telstra has no doubt led to his company receiving less favourable terms from the former monopolist’s wholesale division than more diplomatic companies like TPG have been able to achieve; with the net effect of hurting Internode’s bottom line and its ability to compete for customers.

The company’s reluctance to spend any money on marketing has drastically limited its reach outside South Australia — Hackett joked on the acquisition conference call that “both” of Internode’s customers in Western Australia were extremely satisfied with its service — and its reluctance to go public or accept any outside investment has limited its ability to expand. Perhaps most critically, the lack of Internode interest in acquiring other companies to build scale has left the company in TPG and iiNet’s dust as a distant fifth player in Australia’s broadband market.

There are also other troubling aspects to Internode’s management style.

In August 2008, Internode appointed staffer Patrick Tapper as its chief executive, with Hackett to continue to set the strategic direction of the company as managing director but Tapper to grow the company in practice. At the time there was much speculation that the move was a precursor to Internode listing; speculation that Internode itself helped fuel.

But in reality Tapper became a virtual nonentity.

Does Tapper really exist any more? It’s hard to say. I’ve been covering Internode constantly for the past half-decade and as far as I can recall, I have never spoken to the man. I’ve never emailed him. I’ve never received an email or a message of any kind from him. He does not issue press statements. He does not appear as an important figure in the occasional leaks I receive from other staff inside Internode.

For all intents and purposes, Patrick Tapper has become like the Sheep Man from Murakami’s novel Dance, Dance, Dance; an almost mythical figure locked away in the disused back room of a dilapidated hotel, surrounded by reams of information on things which almost nobody cares about; signifying perhaps nothing, nowhere visible, existing only on the strength of a rumour.

It is extraordinary that Tapper — Internode’s CEO — did not participate in the conference call with Malone before Christmas regarding Internode’s acquisition. What it signifies is that Tapper does not run Internode and never did. The company has always been Hackett’s baby and Hackett’s alone.

All of these aspects of Internode — both the positive and the negative — has lent the company an anti-capitalist, anti-authority swagger infused with the technical excellence that technologists of any stripe worship. Internode has always felt like a company composed of sysadmins, providing services for sysadmins (see: Hackett’s constant re-tweeting of the DevOps Borat Twitter account). And so many have loved the company for it. On that journey, Internode’s weaknesses have become its strengths; its strengths magnified by its honesty. Its capitalist success; perhaps, driven often by its anti-capitalist leanings. Its network engineers, even, permitted high-profile public battles with the nation’s Communications Minister.

Likewise, Hackett has become something more than a man to many in Australia’s IT industry. Instead, he has represented an ideal; a new Internet visionary for the modern era; Australia’s Vint Cerf — promoting online freedom, impeccable quality broadband at a decent price, independence from the mainstream, and even alternative energy sources and communion with the sky.

But all of this could only last so long.

Ultimately, like most companies, Internode’s strengths and weaknesses all stem from its founder. Hackett’s refusal to let Internode become a ‘normal’ company like any other could only last as long as he was personally able to shoulder the responsibility for leading the ISP himself. And now — after twenty years — the time has come where he wants needs to pass on that burden.

That the several reasons which Hackett has professed for handing over his baby don’t stack up is fairly obvious. As Exetel’s John Linton has pointed out, there is no reason for Internode to need scale to handle the NBN, when the NBN has not yet been built. There is no reason why Internode could not list on the ASX and gain enough funding to expand further, with Hackett remaining a dominant shareholder to prevent takeovers (something Hackett has been discussing as recently as September 2011). There is no reason why Internode could not take private investment from a company such as a major private equity firm.

There is also no reason why Internode couldn’t continue on as it is now, gradually buying wholesale services from NBN Co or one of its burgeoning aggregators as the network is being rolled out. This ‘wait and see’ approach will actually likely result in Internode continuing to gain market share as hundreds of thousands of Telstra and Optus HFC cable customers are unbundled from their broadband network for the first time in a decade.

The only reason why Hackett would want to sell at this time is because he is tired of shouldering the responsibility for his company — the avatar of his vision of great Internet access and the power of technology — alone, and he knows that if he hands over the company’s management to someone else, be that through different ownership or simply a different managing director, the company will change; it will become a more normal part of the capitalist system. It won’t be aligned so strongly with his personality any more.

The Chekhov’s gun in this epic story of Hackett’s is Michael Malone’s decade-old offer — continually renewed over the past ten years — for Internode.

What the iiNet acquisition represents for Hackett is a soft exit from his responsibilities at Internode which makes sense. Not financially — because Hackett is already a rich man — but ethically and idealistically. Although iiNet has taken vastly greater steps towards becoming just another part of the capitalist system than Internode has, Michael Malone’s presence at the company continues to ensure it is somewhat on the side of ‘good’ in the vast ethical scale of the economy; the scale on which companies like Telstra, Optus and TPG sit squarely on the side of ‘evil’ — or at best, ‘neutral’.

The minute Malone made the offer to Hackett a decade ago, Hackett must have seen the inevitability of the deal eventually taking place. As someone who is primarily a technologist, Hackett must have known for years that his personal ideals have been holding back Internode from becoming just another company — but he must also have known that an iiNet acquisition would allow much of the soul of Internode to remain in future — although Hackett himself will no doubt depart from its doors. This opportunity — of exiting Internode gracefully, with most of his integrity intact — must have eaten away at Hackett over the many years — the best of many alternatives — until just before Christmas, he finally decided to pull the trigger.

For Hackett himself, the sale will be a good thing. Many commercial matters will now pass from his hands, and he will be free to focus on what he loves best — better technical outcomes for everyone. I am glad for him, and as a fellow Australian, proud of him. Hackett started Internode to solve a problem — universal Internet access — and has lived to see that problem resolved in Australia. Shortly, it may be resolved in the best possible way, with universal fibre to the home.

For the industry, however — and this is why the iiNet acquisition is already so mourned — the true passing of the Internode torch may not be a good thing. We need more visionaries like Hackett and more remarkable, independent companies like Internode. They are truly few and far between. And for iiNet? Well, iiNet has its own inevitability; its own date with destiny; its own imminent question which needs to be answered.

iiNet’s Chekhov’s gun has but one name, in three syllables: TPG.

Image credit: Carl Malamud, Creative Commons

news Exetel chief executive John Linton has labelled as “the sheerest nonsense” the claim by Internode chief Simon Hackett that ISPs will need to gain scale to compete when the National Broadband Network is rolled out around Australia.

In the days before Christmas, Hackett said Internode’s inability to gain sufficient scale to compete in an NBN world was a core reason why he decided to sell the company to rival ISP iiNet. Hackett said Internode, with some 260,000 active services, was “right at the bottom edge” of viability to be a player in an NBN world. “It would be a dangerous thing for us to enter the next era being not quite big enough,” he said. By merging with iiNet, Hackett said, Internode would avoid the NBN precipice.

However, in a blog post published several days later (paywalled), Linton — whose company Exetel is smaller than Internode and is one of a handful of second-tier ISPs left in Australia — criticised Hackett’s claim. “The other nonsense talked about the “NBN making it imperative to be very large to compete in the future” is equally the sheerest nonsense,” he wrote. Linton pointed out the NBN had not been built, and it was “anyone’s guess” as to how many years it would take before the network was rolled out, and what industry changes would take place, “when/if there is one”.

Linton’s words echo comments by fellow second-tier ISP Adam Internet, which issued a statement in the wake of the Internode buyout stating that it was confident about its future in the NBN environment, despite Hackett’s claims. A number of mid-tier telcos are planning to offer aggregated NBN services to allow smaller ISPs to offer a national presence in the NBN environment, although the pricing of such options has not yet become clear.

Asked via email before Christmas to comment on the idea that the need to achieve scale under the NBN was a premature concept, given the fact that the Coalition might cancel or substantially modify the policy if it won the next Federal Election, Hackett emphasised the fact that the need to scale up for the NBN was “only one motivating factor” in his company’s buyout. “The industry is consolidating regardless of the NBN, and the deal makes enormous sense for all concerned whether the NBN proceeds, changes form, or even stops. In all those futures, this company group has a bright future.”

In his blog post, Linton wrote that he very much doubted that Internode selling to iiNet was for the reasons publicly stated. “It was simply money, as always; that and the slight fear for the future of residential services and the sheer burden of running an ISP these days … after 18 years of easy times with the last three being an increasing pressure,” he wrote.

Internode and iiNet representatives — using forums such as Whirlpool — have consistently emphasised since the buyout was announced before Christmas that things would be business as usual with the company, with no immediate plans to change Internode’s service offerings or re-align then along the lines of similar acquisitions by iiNet of companies like Netspace and Westnet.

However, Linton wrote that he believed it “went beyond naivete” to suggest that Internode could continue to operate as a separate entity and that no changes would be made at the company. “To more than naively suggest that “look at Westnet” — still operating independently after almost 4 years” is just a laughable lie — as any Westnet employee or customer would attest to,” he added.
“Not that it matters — no-one shells out money to pay for something they don’t intend to change and there is no need to say such a thing.”

In a broader sense, Linton noted that he didn’t see anything changing in Australia’s telecommunications industry as a result of the buyout. “The reality is that Internode was/is a high priced residential ADSL provider with perhaps 3 percent of the residential marketplace being bought by another high-priced supplier with perhaps 10 percent of of the residential marketplace,” he wrote. “What changes? Nothing at all.”

Linton also discounted the possibility that the Internode buyout would affect any possible interest in acquiring iiNet that rival ISP TPG might have. The company recently bought around 7.24 percent of iiNet, but has stated it has no specific intention regarding the company, other than to own the shares as a strategic investment.

“The mumblings about “protecting iiNet from being taken over by TPG” are nonsensical – it can’t possibly affect such a scenario if in fact it exists,” wrote Linton. “Why TPG is buying up iiNet shares suggests that TPG is interested in acquiring iinet but that scenario, if it is correct, has a long way to go and would be of no interest to anyone other than the iiNet directors/senior management who would lose their toys and have to find new jobs.”

With respect to a possible TPG buyout of iiNet, Linton noted in another blog post that he did expect such a transaction to take place before the end of 2012. In his conversation with another party — who has expressed interest in buying Exetel in the past — Linton said: “we both agreed that there was simply no ‘room’ in the Australian marketplace for iiNet as either a standalone entity and that if TPG did take it over it would probably also see TPG’s demise trying to assimilate the over charging/over staffed iiNet in to it’s strangely arranged company.” It appeared that Linton primarily viewed Australia’s telecommunications marketplace in future as continuing to be dominated by existing giants Telstra and Optus — possibly with Foxtel playing a major role as a content player.

And as for his own company? “If I had any ambitions relating to money then now would be a good time to look for a buyer for our small company,” wrote Linton. “But I don’t. I also have no ambitions for ‘Australian market domination’ that, apparently, are at least part of the rationale for some people; those with no understanding of commercial or any other history.”

opinion/analysis
He tends to exaggerate and you can’t always take what he says at face value, but you can always trust John Linton to loudly say what many others in Australia’s telecommunications sector are thinking. And in his blog posts over the past few weeks he has done just that.

I, like Linton, don’t entirely believe the public rhetoric which both iiNet and Internode have been bandying around as the rationale for the Internode buyout, and like Linton I also suspect that it will become clear over the next year or so that Australia’s telecommunications market will continue to be dominated by Telstra and its little brother Optus for the foreseeable future. The clearest sign of this is the mega-deals which NBN Co has already signed with both. I disagree, however, with Linton — as I will further explore in other articles this week — that the acquisition of Internode will have no impact on the sector as a whole. Clearly, it will have a large impact; and I believe one that will be largely negative.

In addition, as Linton noted, the threat that TPG will buy iiNet hangs over the entire sector at the moment. It’s something which iiNet hates talking about. But it’s the biggest issue in our sector at the moment. With iiNet’s recent acquisitions, a TPG buyout of iiNet would likely destroy much of the competition in the sector and cause TPG itself a mega-integration headache.

In short, if you set aside some of the bluster, it’s hard to disagree with much of what Linton is saying here, although I am not quite as cynical as he is about the future of this market.

Image credit: Delimiter

blog Over on Whirlpool, forum poster Garthy advances an interesting theory about why the iiNet buyout of Internode took place, applying mathematical rigour to the situation to come up with the terrifying (or maybe glorious, depending on which way you look at it) prospect that the event may have the practical effect of creating an infinite number of Simon Hacketts. He writes:

“Simon Hackett still works for, and runs Internode. But who does he answer to? Well, with 100% iiNet ownership of Internode, the answer is now iiNet. In practical terms, he works for [iiNet CEO Michael Malone]. Now who does MM report to? The iiNet board. And the iiNet board? Their shareholders. Now, who has just recently become a big iiNet shareholder? I think you know where I’m going here. Let’s follow the chain of authority here: Simon reports to the Internode board, who report to MM, who report to the iiNet board, who report to … none other than Simon Hackett. Simon’s indirect superior, three levels removed, is … Simon.

Now, we all know what this means now, don’t we- the most logical conclusion that we can draw? There are now at least two Simon Hacketts. But it gets even more terrifyingly sinister.

You’ll notice that the reporting arrangement within Internode involving Simon is recursively defined. Now, if we take a benign recursive function, say, a factorial, you will notice that there is a termination condition. For factorials, it is the 0!, which is 1. However, in the case of the reporting arrangement now in place at Internode, there is NO TERMINATING CONDITION. So basically, what we now have as a result of this deal, is an infinite number of Simon Hacketts.”

The idea that there may be an infinite number of Simon Hacketts out there raises a number of disturbing questions. For starters, what effect will this have on the Tesla and glider markets? Will Internode’s customer base in the near term explode dramatically as those Simon Hacketts request infinite broadband connections? And what will happen to the DevOps Borat Twitter account when it starts to be infinitely retweeted? I will explore these questions and further implications in future analysis. In the meantime, can anyone verify that Garthy’s theory is mathematically correct?

Image credit: Being John Malkovich film

news iiNet’s buyout of fellow ISP Internode demonstrated the dramatic reduction in competition Labor’s flagship National Broadband Network policy was wreaking on Australia’s telecommunications sector, Shadow Communications Minister Malcolm Turnbull said today.

This afternoon, iiNet revealed it would buy Internode, in a move that will vault iiNet into clear third place in size amongst Australia’s fixed broadband players and reduce the number of major Australian ISPs again. iiNet has also acquired a number of other ISPs over the past several years, including TransACT, AAPT and Netspace.

In a telephone press conference following the revelation of the deal, Internode managing director Simon Hackett said Internode’s inability to gain sufficient scale to compete in a National Broadband Network world was a core reason why he decided to sell the company. Hackett has previously publicly criticised NBN Co for its pricing model, which he claimed would not allow even medium-sized Australian ISPs to compete effectively on a national basis.

Responding to the buyout this afternoon, Turnbull said the acquisition demonstrated the effect which the NBN policy had on competition.

“Labor claims the NBN will provide a level playing field and enhance competition, but this merger confirms it will diminish competition – not just at the infrastructure level, but among service providers too,” the Member for Wentworth said in a statement.

“The NBN’s vast expense is the reason it is pricing small, innovative internet and phone companies out of the market. Senator Conroy’s plan will reduce consumer choice, and ultimately increase prices for broadband users.”

Turnbull has previously warned about the NBN’s potential impact on competition. The construction of the network will see a number of existing infrastructure options taken off the table for Australians, with both Telstra and Optus shutting down broadband access via their existing HFC cable networks and Telstra also shutting down its existing copper network as the NBN’s predominantly fibre network is rolled out.

In addition, the Australian Competition and Consumer Commission has previously expressed concerns about some clauses of NBN Co’s arrangement with Telstra which would prevent the telco from marketing wireless broadband services as alternatives to the NBN’s fibre.

Over the past decade, Internode has been a leader in driving competitive outcomes in the telecommunications sector on a number of fronts. On the infrastructure front, it has rolled out substantial ADSL infrastructure in competition with Telstra, Optus and other telcos, becoming one of the first ISPs to offer ADSL2+ speeds up to 24Mbps.

In addition, it has been one of the first companies to offer bundled services like Internet telephony, IPTV and other services. On the regulatory front, it has been active in lobbying the government and dealing with the ACCC to get better outcomes for consumers and in its own business. It has also maintained a strong customer service record, compared to the lesser customer service standards evinced by telcos like Telstra and Optus.

Communications Minister Stephen Conroy has been invited to respond to Turnbull’s comments.

Image credit: Office of Malcolm Turnbull

news iiNet has revealed it will buy fellow Australian Internet service provider Internode, in a surprise pre-Christmas announcement this afternoon which will dramatically consolidate Australia’s broadband sector ahead of the rollout of the National Broadband Network.

The $105 million deal will add some 190,000 broadband subscribers and some 260,000 active services to iiNet’s already extensive customer base, as well as adding annual revenue of about $180 million and annual earnings of about $25 million to the Perth-headquartered ISP. In addition, the acquisition will extend iiNet’s current ADSL infrastructure by about 36 telephone exchanges.

The acquisition itself will be funded by the issue of approximately 12 million iiNet shares to Internode’s principle shareholders, Simon Hackett, with the balance to be paid in cash (minus Internoe’s existing debt) from iiNet’s existing reserves and an extension of the company’s current debt facilities. iiNet will wind up with a debt balance of about $250 million following the transaction, which is expected to be complete by 29 February 2012.

Following the acquisition, Internode will trade as a separate business unit and will continue to be managed by its current managing director Simon Hackett, and his existing team.
In a statement announcing the deal, iiNet chief executive Michael Malone said it strengthened iiNet’s position as “the leading challenger brand” in Australia — ahead of Optus — and the number two provider of ADSL broadband locally.

“Internode is an attractive acquisition, consistent with our strategy of building scale in anticipation of the national broadband network (NBN) market,” he said. “Internode’s experienced management team and excellent customer satisfaction record will allow iiNet to efficiently grow its presence in the South Australian and Eastern State markets.”

“Internode is a successful company with an impressive reputation,” said Mr Malone. “The two companies are clearly a good fit with their strong cultural alignment, industry-leading customer service and shared commitment to innovation.”

In iiNet’s statement, Hackett said he and his team were “delighted” to be merging with iiNet and were excited about the opportunities ahead.

“This is a unique opportunity to increase our presence nationally.” Mr Hackett said. “Internode’s track record of consistently topping national ISP customer satisfaction surveys matches iiNet’s own customer focused corporate strategy. The best teams in the business have joined forces at last.”

“We have highly compatible business approaches, unrivalled excellence in innovation around networks, technology and content, and we gain the obvious benefits of substantially increased scale. The transaction will cement a strong and sustainable future for Internode, our staff, and our customers nationally”.

Hackett’s stake in iiNet, once the settlement is complete, will see him own a shareholding in iiNet of more than 7.5 percent. Malone himself is believed to hold close to 12 percent of iiNet.

iiNet noted in its statement that Hackett had agreed to ‘standstill’ and ‘tender’ provisions with iiNet for a period of 12 months from the period of date of completion. Under the standstill provision, Hackett is prevented from acquiring or soliciting a shareholding in iiNet greater than 7.5% of its issued capital. Under the tender provision, Hackett has agreed to tender his shareholding in iiNet into any takeover offer, scheme of arrangement or other merger recommended by a simple majority of the iiNet board. The news comes as the future of iiNet itself continues to be in play, with rival ISP TPG having recently upped its stake in the company. TPG now owns a total of 7.24 percent of iiNet.

Malone said the merger with Internode strengthens the Company’s position in the NBN environment and will allow iiNet to leverage the market opportunities presented from a base of greater scale. “This transaction consolidates iiNet’s national presence by bringing together the two leading customer service focused brands in the industry.” he said. iiNet is being advised in the deal advised by Azure Capital Limited with legal advice being provided by Middletons. Malone and Hackett are slated to hold a press conference at 4:30 this afternoon.

opinion/analysis
I’ll follow up this article with quite a lot of analysis of this situation, but I will note that on the face of it, it looks like a rather good way to block a TPG buyout of iiNet.

Image credit: Internode

news Serial acquirer TPG has significantly upped its stake in fellow national broadband provider iiNet, with the company now owning a total of 7.24 percent of Michael Malone’s baby.

TPG disclosed in mid-October this year that it had quietly bought about 4.4 percent of iiNet’s shares, a figure which it subsequently updated to 5.14 percent following the purchase of another parcel of stock. At the time, TPG said it had “no specific intention regarding iiNet” other than to own the shares as “a strategic investment”.

This afternoon, Delimiter received an anonymous tip to the effect that TPG had bought another parcel of iiNet shares. We were unable to immediately verify the information, with neither iiNet nor TPG commenting on the issue. However, late this afternoon TPG filed an updated statement (PDF) with the Australian Stock Exchange noting its stake had been upped to 7.24 percent of iiNet.

TPG’s statement revealed it has been buying iiNet shares more or less continuously since mid-October, with trades generally being worth in the tens of thousands up to more than a hundred thousand, and several large trades of $825,000 and $6.2 million. iiNet has been invited to comment on the stock purchases tonight but has not yet responded.

If TPG’s share of iiNet approaches 20 percent, the company will become subject to Federal Government rules which would likely require it to make an offer for the rest of the company; although it is believed that companies can acquire more than that percentage through small ongoing trades without the rule being triggered. It is common for large stakeholders in Australian companies to keep their share below that figure in order to avoid triggering the takeover rule.

Any move by TPG on iiNet would likely be viewed by iiNet’s board as a hostile takeover attempt. The two ISPs have radically different corporate cultures and market approaches, with iiNet being viewed as a very open and friendly company which tends to target mid-level broadband consumers with premium customer service and a quality broadband network, and TPG having a more cut-throat internal corporate culture and a market focus which sees it positioned as one of Australia’s discount kings of broadband.

If an acquisition of iiNet by TPG did occur, it would see Australia’s telecommunications sector drastically consolidated in the arena of fixed-line broadband into just three major players — current incumbents Telstra and Optus, with TPG taking third, or possibly second (above Optus) place. Other rivals like Internode and Primus currently have a reduced market share compared with the existing top four players (including iiNet).

However, iiNet chief executive Michael Malone several weeks said a public inquiry would need to be held if TPG decided to extend its stake in his company to the point where an acquisition was on the cards — and the issue could become a policy question to be decided by the Federal Government. It is believed Malone as referring to the levels of competition in the broadband sector.

opinion/analysis
And now we come to it.

There is now absolutely no doubt that TPG has long-term designs on iiNet. And why not? iiNet is believed to have frustrated an attempt by TPG’s to buy AAPT’s consumer division, and I’m sure the pair have been involved in other efforts to buy out the same assets in Australia’s telecommunications sector. The last shot pays for all, and by acquiring iiNet TPG would be able to roll in a stack of assets, a stack of customers and a stack of fantastic staff into its stable.

Plus, its share buyback scheme notwithstanding, iiNet’s shares have been pretty cheap of late, hitting $2.20 several times over the past six months and staying below $2.40 for most of that time. I am betting that the company’s recent spike (iiNet closed today at $2.69) is due to TPG’s efforts and the share buyback scheme combined.

Now, there is no doubt, as Michael Malone made clear several weeks ago, that iiNet would fight to the last breath to avoid being taken over by TPG. The two companies couldn’t be more different. They have radically different corporate cultures, radically different approaches to the market, radically different structures … TPG and iiNet are chalk and cheese.

Plus, Michael Malone is not done yet with his great dream of building a great Australian telecommunications company to rival the likes of Telstra and Optus. It’s a dream he’s been pursuing for twenty years and he’s not going to let TPG chief David Teoh buy his baby, gut it for costs and start pushing customers onto low cost plans with TPG’s famously low levels of customer service.

I wouldn’t put it past Malone himself to be rapidly buying up shares in iiNet himself at this point. He already owns a substantial chunk of the company — I believe it’s something like 12 percent — and with enough of his own shares, he will easily be able to convince many iiNet shareholders not to sell out to TPG’s ongoing raid. I would bet quite a few iiNet shareholders will be an idealistic lot who’ve been holding onto their shares for many years; they won’t be likely to quickly sell them off for a modest offer from TPG.

In any respect, TPG has now signalled it’s game on. Five percent is a strategic investment. Seven percent and higher is more than that; it’s a shot across iiNet’s bow.

Two further things do really interest me about this whole process. Firstly: David Teoh’s sense of timing. He must know that iiNet’s in the High Court in Canberra this week with the Australian Federation Against Copyright Theft. Malone’s actually personally stuck in the courtroom with no access to his smartphone or communications of any kind (something he is pretty frustrated by). Is David Teoh consciously screwing with his iiNet counterpart? I wouldn’t put it past him.

Quietly buying up iiNet stock over the past month? A bit over a million. Picking up a slab this week? $6.2 million. Thinking about the look on Malone’s face when he exits the courtroom to find out? For David Teoh: Priceless. Probably I’m going a bit too far here. But it’s certainly interesting to think about.

And secondly, there is the irony of Malone’s personal situation at the moment. Could the executive lose his company to a corporate raider, just months after he has been awarded not only the Communications Alliance industry Ambassador of the Year but also the Ernst & Young Entrepreneur of the Year? This would indeed be irony writ large.

Image credit: Delimiter

blog Fascinating interview on Business Spectator today with iiNet chief executive Michael Malone, who argues that Internode founder Simon Hackett should sell the ISP — and preferably to iiNet.

Click here for the full interview. Our personal favourite paragraphs:

“I don’t want to push their price up, but I’ve said it publically before I’m a big admirer of both Adam and Internode in Adelaide … I’ve said this before, I think he [Hackett] should have cashed out about a year and a half ago. I don’t think the business will ever be worth more than it was a year and a half ago when the sector was still very much in land grab mode.”

I guess it’s always been a pretty open secret that iiNet would love to buy Internode if it had the chance. However it’s a bit disconcerting to see Malone commenting so publicly on it. Kind of like if you told everyone in your high school class who you had a crush on. Everyone already probably knows … but should you shout it out loud?

Image credit: Internode