ow the tables have turned.
Last fall, on a business tour of Israel by a group of American executives, James A. Courter, chief executive of the offbeat New Jersey telecommunications company IDT (news/quote), was on a Masada-bound bus with William J. Rouhana, chairman of Winstar Communications, a rising star in the United States telecommunications market. At the time, Winstar was a Wall Street darling with a stock market value exceeding $11 billion. IDT, toiling in the unglamorous fields of wholesale long-distance and prepaid calling cards, had a market value of $1 billion and no buzz among analysts.
Mr. Rouhana proposed that Winstar buy IDT, Mr. Courter recalls. "I told him we weren't interested in selling," Mr. Courter said. "But if he wanted to make an investment, cash is always good."
Cash is still good, as IDT demonstrated last month when it bought Winstar out of bankruptcy for $42.5 million in cash and stock. Indeed, IDT has made something of a specialty of capitalizing on the flashy flameouts of the telecommunications crash.
"Most of its competitors have either gone bankrupt or have been reduced to penny stock status," said Andrew Sidoti, an analyst for Wm. Smith & Company. "They're well positioned to take advantage of the depressed valuations in the industry."
With more than $1 billion in cash, $1.2 billion in annual sales and no debt, IDT has also bought out its top competitor in the prepaid calling card business, PT-1, for $30 million. And it repurchased the nearly one- third stake in its Internet telephone unit, Net2Phone (news/quote), that AT&T (news/quote) had acquired. IDT bought the stake in October for $92 million, or $5 a share, a year and a half after selling it to AT&T for $1.1 billion, or $75 a share.
IDT's ambitions do not stop at telecommunications. In November, in its first foray into the media business, IDT bought the Talk America radio syndication network for $3 million, and it has not ruled out buying radio stations down the road if prices fall.
"What really attracted me to Winstar was its ability to do broadcast," said Howard S. Jonas, the chairman of IDT. Winstar aimed to compete with the local Bell telephone companies by providing a package of voice, data and video services — not through wires or even optical fiber, but using radio waves.
"Sure I want to be the biggest telecom company in the world, but it's just a commodity," Mr. Jonas said. "I want to be able to form opinion. By controlling the pipe, you can eventually get control of the content. If anyone can make it work, we can."
Founded by Mr. Jonas in Newark in 1990, IDT pioneered international telephone call- back service — a way for callers overseas to avoid the high rates of foreign monopolies by placing calls through numbers in the United States. The company, which went public in March 1996, was also an early proponent of offering phone calls over the Internet, through its Net2Phone unit.
Nearly 72 percent of IDT's revenue now comes from prepaid calling cards. The rest comes from wholesale and consumer long- distance and an investment arm, IDT Ventures, which has yet to turn a profit.
Intense competition in the wholesale long- distance market has eroded margins in IDT's telecommunications business. For the fiscal year ended last July 31, the company had an operating loss of $432.7 million on revenue of $1.2 billion, after a special charge of $199 million. Now IDT must take its newest acquisition and make it profitable — no small task, given that Winstar had a cash-burn rate of more than $10 million a month when IDT stepped in.
Charles H. F. Garner, chief executive of IDT Ventures and Winstar's interim chief, said he had reduced the monthly outlay by $2.5 million and hoped the company would break even by the end of the year. Winstar had revenue of $200 million last year.
Focusing on business customers, Winstar has spent more than $5 billion since its founding in 1993, outfitting 3,500 office buildings in 32 cities with its technology. The company says it can provide all the services of a local and long-distance telephone company — but wirelessly. Its network beams radio signals from hub stations to satellite dishes on top of office buildings, where the transmissions can be converted to voice, video or data feeds.
The Winstar purchase gives IDT its long- sought "last-mile" connection and complements long-distance service and its domestic and international fiber optic network.
"When you put the pieces together, what does Verizon do that we can't do?" Mr. Garner said. "Winstar has a network that works, a sizable customer base, and it allows us to be a full-service phone company."
What Winstar does not have is enough customer revenue. Its 29,000 customers include some prestigious clients, like the Securities and Exchange Commission and the federal courts. Yet, within its office buildings around the country, only about 2 percent of tenants have signed up for Winstar's service — in part because the company was too distracted by raising money, and then grappling with its bankruptcy, to focus on sales. Mr. Garner said he planned to bolster Winstar's sales force and create a national sales team over the next year.
IDT also has a financial advantage that Winstar did not: IDT was able to leave Winstar's $5 billion debt in bankruptcy court. Last month, the court also gave IDT until April to determine which of its existing service contracts it wished to keep, and which ones it wished to terminate if it deemed them uneconomical.
"Our primary goal is to cut costs," Mr. Garner said. "We're looking at the company piece by piece and getting rid of anything that doesn't fit into our core business."
If Mr. Garner is focused on the day-to-day survival of Winstar, Mr. Jonas is the visionary and has his eye on a bigger prize: melding telecommunications with media.
Mr. Jonas has created a separate subsidiary called Broad Street Entertainment to explore cable programming for business customers. His goal is to provide content for workers who do not have time to watch traditional prime-time programming in the evening but who would be captive audiences at their computers during the day. He said he had started pitching the idea to some of media's heaviest hitters, including Rupert Murdoch of the News Corporation (news/quote). A spokesman said Mr. Murdoch had no comment.
One advantage IDT has with its media strategy is the presence of the cable industry magnate John Malone, whose Liberty Media Group has a 10 percent stake in IDT. It was Liberty Media (news/quote) that put up the bulk of the $92 million that IDT paid to reacquire AT&T's stake in Net2Phone.
IDT's run of deals has benefited its stock, which closed on Friday at $19.07 — nearly double its 52-week low. Yet, even institutional investors who see long-term value in IDT's stock admit to uneasiness about how the company disseminates information.
"They tend to be very coy and secretive about what's going on in the company, which is frustrating to investors," one institutional investor said. "The financial statements are vague in terms of segmenting the businesses so that a reasonable investor can determine profitability trends."
At a meeting in July at the company's headquarters in Newark, institutional investors asked Mr. Jonas why, with so much cash on hand after the Net2Phone deal, he was not buying back shares, which would benefit shareholders. "He said he may be more interested in his artistic endeavors than in being rich, and then he talked about his interest in pursuing media deals," said the institutional investor, who attended the meeting. "Investors were taken aback, because he implied that maximizing shareholder value may not be his main focus."
In fact, since May 2000, IDT has bought back 15.6 million shares for about $250 million. But Mr. Jonas makes no bones about his irritation with Wall Street and its analysts, many of whom he said had focused on rapid growth at any cost rather than on profitability during the heyday of telecommunications financing.
"If they want to own stock, own stock," Mr. Jonas said. "I'm not nuts about high stock price and analyst coverage. We have a long-term view of what we want to do."
