Life After Bankruptcy

What will life after bankruptcy look like for data center service providers? We're getting a better idea of this as more companies emerge from Chapter 11, shorn of most of their debt and a fair percentage of their employees. The latest examples are McLeod USA, which emerged from Chapter 11 today, and ServerVault, which was acquired out of bankruptcy yesterday with its management intact. Going forward, the telecom and data center industries may become the largest test yet of Chapter 11 as a business tool.

With much of the industry either in bankruptcy or headed there fast, there's no question that Chapter 11 no longer has the stigma it once did. Customers who shun companies with a recent bankruptcy will find thinner pickings. Of course, there's always IBM, EDS, Sprint and WorldCom. But hosting with these huge corporations generally means paying a "stability premium." Many price-conscious customers will continue to scan the New Economy providers for hosting solutions.

This raises a key question for customers. Which provider should you trust with your data: the one working to avoid bankruptcy, or the competitor who has been there and back already? The post-bankruptcy provider may have lower overhead, and be more aggressive with pricing.

Will the future reward those companies that have worked hard to manage their debt load and make good on their obligations? Or will they now find themselves at a disadvantage to leaner competitors who filed Chapter 11?

I'll wager that in years to come, when scholars and analysts study the effectiveness and fairness of the bankruptcy code, they'll look to telecom as the testbed of how well Chapter 11 has balanced the dueling interests of businesses, customers, investors and creditors.