Industry Overview

Although Voice over Internet Protocol (VOIP) technologies have yet to gain the widespread acceptance originally predicted, the value proposition offered by many VOIP service and technology providers is leading industry analysts continue to expect a boom in VOIP technology and strong financial stability amongst VOIP providers in the near future. VOIP traffic is projected to account for approximately 75 percent of the world’s voice traffic by 2007, according to Frost & Sullivan. In the past 12 months VOIP service and technology providers have suffered financially, along with other telecom and Internet-related companies, and multiple VOIP companies lost 90 percent of their stock value. However, the poor financial situation forced VOIP providers to re-examine their business models and many companies have experienced stabilized stock prices and have attained a clear path to profitability.

Rapid Growth and Consolidation

The question isn’t IF, the question is WHEN. The numerous and weighty advantages provided by VOIP technologies, such as minimal capital investment because companies use the existing network infrastructure and low monthly charges because Internet calls are not subject to tariffs or rate changes, continue to force major telecommunications and technology corporations to seriously examine VOIP solutions and stake claims on the providers they believe will dominate this rapidly expanding market. In August 2000, AT&T purchased 39 percent voting stake, a $1.4 billion cash investment, in Net2Phone, the industry’s leading VOIP service provider.

VOIP providers that anticipate strong financial results in the near future have re-focused their efforts on providing enhanced VOIP services to their customer base either through layering enhanced services on top of their wholesale business or designing enabling technologies that allow the enhanced services to work. This strategy, employed by company’s such as iBasis (NASDAQ: IBAS), Net2Phone (NASDAQ: NTOP) and iLink (NASDAQ: ILNK.OB) has already begun to fuel growth and consolidation within this industry; a trend which is expected to continue at an accelerating pace in the near future. IDC predicts the VOIP equipment industry, specifically VOIP gateways, to also flourish in the upcoming years, projecting a 37 percent five-year compound annual growth rate, as shown in Exhibit 1.

Multiple market conditions are also contributing to the expectation of future industry consolidation. A more difficult credit environment, in conjunction with limited access to financial markets, has led numerous companies to seek strategic partners or to consider selling. Larger companies that recognize the potential of the VOIP space and understand that they cannot afford to fall behind in this rapidly evolving industry have opted to acquire the needed technology rather than to devote years in developing the technology internally. These larger players realize that current market conditions are extremely favorable for acquiring smaller companies that need financial stability. Due to the current economic conditions and anticipated explosive growth of the VOIP industry, RCW Mirus anticipates a high amount of consolidation in the near future for VOIP players.

Value Drivers

RCW Mirus believes the following points are critical in driving value for middle market VOIP communications companies:

• Business Model – The ability for companies to demonstrate a strategic and operational business model that clearly outlines an attainable plan to reach profitability in the short term will be vital.
• Scalability – Success is also dependent on companies’ ability to operate a scalable model and technology that can meet future demand.
• Technology – Companies must have defensible, high quality technology and a highly qualified support staff that consistently meets and exceeds the needs of its clients.
• Strategic Partnerships – Successful companies have developed strategic partnerships with key customers and alliances with companies that possess supporting technology.
• Executive Team – Prudent management who posses the right vision for the future of VOIP communication will lead their company to prosperity.

Recent Transactions

The rapid growth of the industry is fueling consolidation at attractive prices for owners. The following is a list of recent transactions:

• eStara acquired ITXC’s Push-toTalk e-commerce service – October 2001, Undisclosed amount
• Motorola acquired RiverDelta Networks – August 2001, $300 MM
• Eiger Technology acquired Onlinetel – August 2001, $3 MM
• Adir VOIP Technologies acquired NetSpeak – June 2001, $47 MM
• iLink acquired WorldxChange Communications– June 2001, $13 MM
• InternetVIP acquired Yapalot Communications – June 2001, Undisclosed amount
• iLink acquired Nexbell Communications– April 2001, $8 MM
• dba Teleccom acquired e-tel Corporation – March 2001, Undisclosed amount
• iBasis acquired PriceInteractive – February 2001, $90 MM
• AT&T acquired a 32 percent ownership in Net2Phone – August 2000, $1.4 B