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The Fall of the House of Schrader

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Live Online 1 p.m. Today: Discuss PSINet and CEO William Schrader with reporter Keith Epstein
PSINet Sees $3.2B 4Q Loss (Apr. 17, 2001)
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By Keith Epstein,
Special to Washington Techway

Tuesday, April 17, 2001; 11:21 AM

Bill Schrader's home is more than two centuries old. A pale yellow, colonial-style mansion with huge pillars, it reigns imposingly over the same landscape that greeted Northern Virginia's first wave of pioneers, back when cutting-edge meant cutting edge: the cutting edge of an ax. At first, it seems a strange house for one of the founding fathers of the electronic superhighway, a maverick whose gigabytes of astute premonitions and daring acquisitions once earned him millions and cover-story monikers such as "Internet mogul" and "golden geek."

PSINet's William Schrader has seen his company's fortunes tumble in the last year. (Illustration by Zachary Pullen)

For William L. Schrader is by many accounts a man always on the move and pushing ahead. He has always been turned on by the possibilities of the future fast supercomputers, global networks, ISPs, stringing together so much fiber optic cable that it would reach the moon and back, twice over. He's the kind of person who owns a Harley but would rather work late at night on the high-speed lanes of technology and Internet commerce. Even as treasurer of his senior class, he'd sell yearbook ads instead of going out with his girl and their friends.

"I'd be surprised if he went out on that Harley a dozen times last summer," laughs Ed Postal, a former member of his management team. "Hobbies? Bill? His hobby's his life's obsession the Internet."

To be sure, the house, built in 1750, has a tennis court, swimming pool and one suspects the latest in comforts and connections. For all its bucolic isolation, Schrader is only minutes from the spiffy headquarters of PSINet, where he has presided over one of the brightest commercial successes and fastest-burning disasters of the high-tech age.

Suddenly with once-soaring shares frozen at mere pennies, markets tumbling, angry shareholders filing lawsuits, business assets sold off, litigators and creditors circling, his own family's paper profits petering out, the corporate jet gone now the company's location seems most aptly named: Ashburn. If nobody buys the Internet access provider soon, the company intends to file for bankruptcy.

But why this old mansion and hay barn? What is Techtopia's crown prince doing here?

Col. John Singleton Mosby nearly met his end at the house in which William Schrader now lives in Sterling. But he and his band of raiders survived a surprise Union attack to take more than half the attackers prisoner. Friends say Schrader is now fighting just as hard on his own rally. (Photo by Olivier Douliery/Techway)

Schrader himself will not, for now, provide answers. In recent weeks, the 49-year-old CEO has declined repeated requests to talk about himself though, as with the markets, this is a big turnaround. There was a time when Schrader seemed to want to appear everywhere, banter with everyone, especially reporters who loved his brash quotes. Though Schrader sometimes shot rifles at firing ranges, he preferred taking aim at telephone companies for being "monopolist pigs" and "dinosaurs" lumbering, slow to adapt, deserving of extinction.

At the moment, though, Schrader is keeping more to himself, behind a firewall of lawyers, public relations personnel, restructuring experts and other guardians. Outnumbered, surrounded, battered, he's hunkering down something that's happened in this house before.

Perhaps the clue lies right there, on the historical marker that stabs into Schrader's front lawn. It commemorates the upset victory by the commander of Mosby's Raiders, one of the most infamous guerrilla bands of the Civil War. Bypassing traditional Army conventions, Col. John Singleton Mosby captured generals and destroyed railway lines the same way Schrader has aimed to take out competitors with aggression and flamboyant disregard for the usual conventions and policies or even, sometimes, the amount of cash in the bank. Mosby, like Schrader, had a reputation for pursuing his ideals fiercely, independently, innovatively and stubbornly. Like Schrader, he took risks. And, on one fateful morning in 1863, Mosby also found himself at this same pale yellow Virginia mansion, surrounded and outgunned, with the odds against him.

Back in the 1980s, after dabbling in a home improvement business and project management of Cornell University's biology department, Schrader was persuaded by Kenneth Wilson, a Nobel physicist at Cornell, to build a supercomputer center at the university. Originally, the idea was to attract researchers to Ithaca. But Schrader and his colleagues figured it would be easier to move bytes than brains. Plans evolved into high-speed, cross-country connections between five supercomputer centers Internet 1.0.

Schrader worked fast. So fast, in fact, that he once put in an order for a supercomputer costing millions of dollars without getting anybody's permission. Money hadn't been budgeted. Never mind procedures Schrader believed in the supercomputer's necessity. He got his wrist slapped, but no matter: By then, the center had its computer.

He also rushed headlong into stringing together that first Internet the minute his contact at the National Science Foundation agreed he might use NSF funds. He didn't wait for NSF sign-offs. Never mind assembling a team of engineers to study the project first. Schrader grabbed the phone, dialing AT&T's salesman in Ithaca and designing on the fly. He ordered 56-kilobit lines. Within weeks, the nation's first high-speed network was finished.

"He's what I'd call, in Yiddish, a beetzuist someone who does something first and gets permission later," observes Richard Mandelbaum, one of Schrader's earliest partners.

Another old associate from those days of stringing together big universities, PSINet co-founder Martin Schoffstall, used to say Mandelbaum "provided air cover" for Schrader. "If Bill went too far, I'd clean up. I'd take care of the messes," recalls Mandelbaum. "There were all kinds of things he did that got the NSF annoyed. He wouldn't follow rules. Things would get sticky. People would be offended. So I'd tell them, 'Look, that's just his way. He's a determined guy.' And of course he enjoys being outrageous."

Clearly, academia was not for Schrader. People would debate how many angels danced on the head of a pin, when he could actually make things with objects that fit on the head of a pin. And make money doing it.

Now that they'd linked supercomputers in academia with the New York State Engineering and Research Network, or Nysernet, Schrader's dream was to use Nysernet to link businesses. He wouldn't take no for an answer. If Nysernet's governing board refused, he threatened to hook up businesses on his own. They did and so did he.

Schrader and his wife, Kathleen E. Duffy, sold the family car, a 1976 Ford. They took a second mortgage on the house well over what the house was worth. They pushed credit cards to the limit. They wondered if they were nuts.

Together with Schoffstall, now managing partner of Reston-based Schoffstall Ventures, they cobbled together about $300,000 to start a company called Performance Systems International PSI. It would offer commercial access, maybe even consumer dial-up. It would link the world or bankrupt them.

"I had always anticipated that this Internet thing should be part of the communications fabric of the world, not just in New York state," Schrader recalled in a 1999 interview.

Not that most people had ever heard the word "Internet" yet. This was in 1989, long before dot.coms. There were moments, as Schrader has related the story to associates, when he and his wife stared at each other, wondering if they were crazy. They had three boys. What would they live on? But never mind. Doubts more often energize than slow Schrader. In tough times, he liked to say to associates, "We'll have to take out the old nine-millimeter."

His going-away present to Mandelbaum was a pistol, polished and carved by a Syracuse craftsman. It's made of wood and fires rubber bands. Not a real gun but symbolic enough to Mandelbaum that he treasures it for what it says about Schrader.

"Doesn't matter what the odds are. Bill's not one to mope," explains Mandelbaum. "He does get emotionally involved in running things, though. Instead of dispassionately handling money, he has more of a technologist's attitude. You know why? Because he's out to change the world. And that alters the risks you're willing to take."

During the Civil War, Col. Mosby's single-minded knack for plotting and then successfully infiltrating enemy lines, grabbing thousands of horses and hundreds of thousands of dollars in soldiers' pay, even rousting enemy officers from their beds, "annoyed" Gen. Sheridan so much the general grumbled about Mosby in his memoirs. During the early telecom wars, Schrader, too, single-mindedly managed to innovate, build, grow and agitate in ways that are not easily forgotten.

PSINet became the first to link computers on 1.5 million bits-per-second T1 lines, and the company won the race to provide dial-up Internet service for consumers. The company's $1 billion valuation when it went public in 1995 transformed Schrader, his family and even entry-level employees into instant multimillionaires.

The company began diversifying, buying software companies and racking up hefty losses. Analysts didn't care for Schrader's brash style, which many said contributed to PSINet's faltering valuation. The company regrouped and by 1997 drafted a longer-term strategy that was sufficiently persuasive to raise $600 million in high-yield bonds. Share prices rose.

"To some people, the Internet can seem too good to be true," Schrader wrote in a January 1997 article in an industry publication. The title: "Why the Internet Crash Will Never Happen."

Schrader and his company continued to prosper. Riding the Internet wave of the late 1990s, PSINet gained 100,000 corporate clients, with switching, satellite and hosting centers serving 900 cities in 28 nations. The company dubbed itself the Internet "supercarrier," swelling eventually to 10,000 employees. It was one of the first sparks in Northern Virginia's technology boom.

By 1999 the company's value rose to more than $3 billion. Two companies were interested in buying, one seriously, but Schrader stubbornly refused, saying he would only sell if someone placed "an ungodly amount of money" on the table.

"Why would we sell?" he asked an interviewer in June 1999.

Schrader popped up in the public eye regularly, at hearings on Capitol Hill on issues such as encryption and domain names, and on CNBC, MSNBC and CNN. In 1998, Ernst & Young named him "Master Entrepreneur of the Year." Computer Reseller Magazine pegged him as one of the telecom industry's "Twenty to Watch." He was called an Internet "cowboy" and digitalsouth magazine asserted that "if the Internet had a Declaration of Independence, William Schrader's signature would be on it." Even among other regional techno-titans, Schrader seemed to come out ahead. Schrader had become, one Washington area wag opined, "the mind that MicroStrategy's Michael Saylor fancies himself to be."

That only encouraged Schrader's boldness. Techtopia's crown prince boldly took on the giants of telecommunications not only in the marketplace, but in the media. "The telephone industry has no innovation in it," Schrader declared, characteristically, during a June 1999 interview. "This is not a telephone company environment. They will not thrive here. They will die here. So when you ask a bunch of dinosaurs, 'Who do you think is in charge?' You'll get them saying, 'The dinosaurs are in charge.' For all of us little mammals, we say, 'Right.' Just let them be. We're the mammals because we can adapt. We saw the meteor coming, we hid in a cave, all the dinosaurs croaked, we came out and say, 'Hey, looks pretty good.' The Internet is the meteor."

The dinosaurs, it turns out, are not only still kicking and breathing, but now also licking their chops. The pesky mammal looks like a pretty divine dish; ironically, those lumbering telecom giants may have a shot at devouring some of PSINet's assets. And not for even half an ungodly sum.

Schrader missed his own chances, too. Back when he was surfing the top of the Internet crest, he was ungodly wealthy. In 1998, his own shares were worth $77 million, and while his compensation and bonus in 1999 totaled about $750,000, had he sold at the stock's peak last year he could have made more than a half-billion dollars.

He spent some of his money, or at least money gained through huge loans using his shares as collateral, purchasing $2.5 million and $1.2 million properties in Captiva, Fla., overlooking the Gulf of Mexico. He went sailing, though rarely. His wife owns a $713,000 home not far from Smith Mountain Lake near Roanoke. But associates say he never seemed too interested in money or the outside activities money enabled. On a bio once, he referred to one of his favorite movies "Apocalypse Now" but listed among his interests "work." A man on a mission, he apparently never thought of selling his shares.

At work, he could be both inspiring and intimidating. Some executives sweated profusely under his gaze and unrelenting scrutiny; others loved him.

"He really encourages you to stretch yourself," says Postal, who Schrader hired as PSINet's chief financial officer in 1996. "He comes on strong, and you've got to be ready to debate him."

Sometimes, Postal would retreat from the heat of his conversation with Schrader to compose a response via e-mail. "He's such a good debater, I had to make sure that he might not win the debate but miss the point," explains Postal, now chief financial officer at Cidera. "Then he'd usually come by and commend me for it. He's got a rough exterior, but don't let that fool you he's got a terrific interior."

Alan Daytner, Schrader's construction manager who was developing data-hosting centers in Asia and Europe, recalls his first strategic planning meeting with the top executives two years ago. Schrader was wearing his usual sports jacket, jeans and collared shirt, as if heading for Friday night dinner with friends.

"There I was, a new employee, and he was two seats away. Suddenly in the middle of the meeting he leans over, grabs my tie, says, 'What's this? You don't have to wear that.' He connected with me right away. It's been a joke with us ever since."

By 1999, things looked so robust the company agreed to pay $106 million over two decades on a brash marketing ploy placing its brand on the stadium of the Baltimore Ravens. It worked: People who had no idea what the company did at least knew its name.

Schrader also had become something of a venture capitalist, spending his own borrowed money on promising startups. At an industry breakfast, Peter Mechlin approached Schrader to shake his hand and make a cold pitch about his idea that people might advertise yard sales on a Fairfax Internet site. The two had never met. Schrader was sold immediately. He soon delivered some PSINet Ventures capital for yardsales.com, and kicked in some of his own money.

Meanwhile, Schrader had been overseeing a stunning corporate shopping spree, as PSINet snapped up no fewer than 70 companies between 1998 and the first part of 2000. The rapid acquisition doubled PSINet's staff, drove up the share price and, many analysts believe, laid the foundation for failure with a poor integration strategy. Paradoxically, one of the world's largest networks for Internet traffic wasn't able to network with its own acquisitions.

"Everybody was trying to build as fast as we could," recalls Daytner, whose job in development placed him on the front lines. Sometimes, equipment had to be ordered before designing had even begun. Operations and sales were having trouble keeping up. "Double-shifts, round-the-clock, weekends. A real compressed schedule. It was one big race. Because the first guy in the market to host centers gets the customers."

Talk about fast burn. The company foundered under the debt load. Today, it's $3.6 billion in the red, with another $50 million in payments due by June. During the last six months of 2000 alone, Schrader's corporate dreamchild burned through $1 billion. Investors and Wall Street had tugged him toward ever-higher revenue targets and market-share, and the company repeatedly missed its own goals. Meanwhile a glut of similar networks and services drove down prices. As went many dot-coms, so went the dot-coms' "supercarrier."

"He can be brash. He can be outspoken. And Wall Street doesn't like that," observes F. Drake Johnstone, who tracks the company for Richmond-based Davenport and Co. However, "what the problem really boils down to is the decisions to grow too fast. He did it because he thought he could and the capital markets would support him. He got a little carried away. Everyone in the sector did. I'd say William Schrader is really emblematic of the excess that was going on, and that we're all now paying for."

The scene of Col. Mosby's first success is a half-hour by car from Schrader's 1750 mansion. One day, Mosby and his guerrilla band managed to sneak well behind the Union lines and at Fairfax Courthouse they plucked a general from his sleep. The capture was impossibly bold precisely why Mosby figured he'd succeed. If you wanted to go for a general, why not just go for the general?

Schrader, too, doesn't believe in going slow. "He's got a laser-sharp focus, and he's very intense. There's not a lot of beating around the bush or sidestepping of issues or sugarcoating. What he wants he just goes for," observes Steve Wallman, chief executive officer of FOLIOfn.

When Wallman, a former commissioner of the Securities and Exchange Commission, pitched his concept for foliofn.com to the PSINet CEO, Schrader was characteristically impulsive. "I couldn't stand it; I had to invest!" Washington Business Journal quoted him as saying. Schrader is on Wallman's board, and Wallman considers him a friend.

"It's a tragic story, really," Wallman says of Schrader's fall from giga-grace. "Because Bill took some risky moves to get some high returns. He did some things that in retrospect obviously were issues. But had the market not turned the way it has, the demand for PSINet's services would have accelerated and people would have seen more need for infrastructure. If things had gone differently, he would have been perceived as a genius."

Last November, Schrader also faced the horror of having his stock holdings liquidated by the Bank of America in an embarrassing margin call. Prices had sunk too low, and the shares were seized and sold. Ironically, he's fared better than his family; he had use of a $25 million line of credit. But his family's 2.4 million shares, valued at $144 million last March? They're worth only about $450,000 now.

If Schrader never believed in going slow while ramping up, he certainly didn't believe in it while sizing down. Beset with losses, PSINet launched the corporate equivalent of a distress sale, rushing to forestall disaster by writing off or selling off properties.

Within months of acquiring Metamor Worldwide of Houston last year, for more than $1 billion, PSINet wrote it off as a $500 million loss and hired investment bankers to find a buyer. Last month, PSINet sold Transaction Network Services, which it had acquired in 1999 for $720 million, back to the original owners for only $300 million.

Ulric Weil, senior technology analyst at Friedman, Billings, Ramsey & Co., made a bet with Schrader years ago. If Schrader ever become profitable, he owed Weil dinner. Back in 1998, Weil figured it was time to pay up. And now? "Who knows? Who cares?" Weil groans. "That feels like such a long time ago. Owing me dinner? That's the least of it."

PSINet CEO William Schrader has more in common with Col. John Singleton Mosby than his house, site of a big victory by Mosby's Raiders during the Civil War. The two men share reputations for being aggressive, flamboyant, independent, innovative and stubborn.

Col. Mosby might have been finished for good at Schrader's house not just defeated, but dead. One dawn in 1863, as Mosby and his troublesome band of 69 men slumbered, 150 Union cavalry sneaked up on the sleeping Confederates, surprising them in the house and the hay barn. At last, the Union commanders thought: They had the pesky devil. Mosby's rangers rallied. They drew revolvers and sabers. Blood spilled. The morning wore on. When it was all over, the underdog guerrilla band had taken more than half of the Union soldiers prisoner, wounded many, and lost only a handful of their own.

Friends say Schrader, too, doesn't give up and hasn't now. But those who know Schrader expect that, like Mosby, he'll rally. Explains ex-CFO Postal: "He's not the type to get depressed or throw in the towel. He's a very driven person. I can assure you he's busy planning his next steps. And if you look at his life, he's been up and down, up and down. I'm sure he's not even looking at the economic aspects of this, what it does to his net worth. He's never been in this for the money. This isn't about PSINet. The Internet is like a religion to him."

Schrader's father and grandfather were carpenters, and he used to joke with Postal that he'd been born with a wooden spoon in his mouth. Schrader understood the value of hard work, having to depend on yourself. The upbringing, Postal says, also explains Schrader's almost ideological obsession with his work. He views electronic connections as a way to break down traditional barriers between people of all classes and nations; it's not just a commercial revolution, it's a democratic one.

"Allowing people to communicate across boundaries that's important to him," says Postal. "Bill believes the Internet is the next step in leveling the playing field for people to be productive and happy."

Signs of Schrader's human side emerged in an e-mail dispatched to employees last month. He urged workers to focus on jobs rather than the stock market, and to be kind. "We are all tired of the stress," he wrote. "A warm handshake or a hug will go a long way to remind us that we are all on the same side of the battle."

"He's been beaten pretty badly by this larger storm that's raging out there," muses Wallman. "It's really tragic. Some heads of companies aren't very smart or passionate. But here's a person who as a CEO exhibited all the opposite attributes he's very smart, very dedicated, very, very passionate. He knows his business. And yet, even with all that going for a person, sometimes things just don't work out."

Keith Epstein is a Washington-based investigative journalist and freelance writer. A former investigative reporter in the Washington bureau of The (Cleveland) Plain Dealer, he now writes for The Washington Post and the Discovery Channel's Web site, discovery.com.

Washington Techway staff writer Brendan Barrett contributed to this story.

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