Death of a cloud services provider
Once-promising global company Zenith Infotech will close its doors in October, notes Larry Walsh
The end of beleaguered India-based cloud services provider Zenith Infotech now has a date - 15 October 2014 - a little more than three years after the debt crisis began that would ultimately lead to the demise of the managed services, backup and cloud infrastructure service provider.
Over the US's Labor Day weekend, Zenith Infotech started informing US partners that it will cease operations in six weeks, after final attempts to resolve its crushing debt issues failed and legal remedies were exhausted. The India-based company has been fighting a liquidation order, sought by creditors, for the past 18 months.
According to an email sent to partners and obtained by Channelnomics, Zenith Infotech says liquidation ordered by courts in India will begin 1 September. In the intervening six weeks before the shutdown, partners will have the opportunity to recover data stored in Zenith Infotech systems.
After 15 October, Zenith Infotech images will be deleted and NOC support will cease.
The good news for partners is that Zenith Infotech will not charge for services and support during the final wind-down period.
The ultimate closure of Zenith Infotech brings to an end a three-year saga in which the once-promising managed services and backup vendor initially sputtered and then spiralled downwards.
In September 2007, Zenith Infotech started recruiting partners around the world to resell its hosted managed services. At the time, hosted managed services was a new model, under which Zenith Infotech would provide most of the back-end technical infrastructure and support, while partners took care of the front-line customer interaction.
At first, the model was a hit. Solution providers were attracted to the framework because it provided reliable technology at a low cost. Moreover, Zenith Infotech's model had a lower barrier to entry in costs and technical development than competing remote monitoring and management vendors.
Zenith Infotech expanded its value proposition with the introduction of appliances that backed up data to its cloud infrastructure. The affordable product was popular among partners and customers, as it made simple work of data protection.
Just when Zenith Infotech started failing is unclear. At some point during its build-out, Zenith Infotech issued nearly $85m (£52m) in foreign currency convertible bonds to fuel its growth and technical development. In the early part of this decade, Zenith Infotech started shifting its attention away from managed services to cloud infrastructure services.
In September 2011, Zenith Infotech shocked the North American channel with the sale of its hosted managed services business to Summit Partners, a Boston-based private equity firm, for $55m.
The transferred assets were used to form what would become Continuum, which is now a leader in hosted managed services.
Just days following the asset sale to Summit, Zenith Infotech defaulted on the first tranche of its debt, totalling $33m. The debt service failure lead to the automatic default on the second tranche of $50m.
At the time, Zenith Infotech management insisted the default was a temporary setback and it was working with creditors to restructure its debt.
In reality, the default exposed serious financial and structural issues within Zenith Infotech. Rather than working with Zenith Infotech to restructure the debt, creditors insisted on receiving full payment, pressed the case into the Bombay courts, and picked apart the company's finances and operations.
Some speculate that Zenith Infotech bet the India regulatory and court system would turn a blind eye to the default and allow it to pass without penalties. Numerous Indian companies had defaulted on their foreign financing without consequence.
Unfortunately for Zenith Infotech, the India regulators were no longer apathetic in enforcing creditors' claims.
The long-running court battle revealed Zenith Infotech was actually a series of loosely aligned companies spread around the globe.
Courts and regulators eventually discovered Zenith Infotech had improperly sold its managed services assets by not notifying investors and improperly transferred the proceeds to a subsidiary to avoid taxes and debt payments.
Earlier this year, the High Court of Bombay denied Zenith Infotech's appeals to delay or invalidate an earlier ruling, in which the creditors won a petition to have the company liquidated for its assets. The court gave Zenith Infotech until 31 August to sell its cloud services.
There's no indication as to whether the cloud assets were sold.
The debt and legal proceedings took a toll on Zenith Infotech and its channel. Many solution and managed service providers remained with Zenith Infotech as resellers and supporters of its backup services.
As details emerged about the gravity of the debt issue, partners began defecting or being lured to competing brands. Nearly every backup vendor - including Datto, StorageCraft, Unitrends, eFolder, and Continuum - has conducted competitive displacement programs.
Declining business and channel defections also had an impact on Zenith Infotech. Over the past three years, the company's US headquarters outside Pittsburgh went from a thriving operation to a shell. The decline was marked by the initial thinning of teams that turned into a skeleton crew of what eventually became a lonely outpost.
The final line of the five-sentence email sent to partners over the weekend may now serve as Zenith Infotech's epitaph: "We thank you for all your patronage and understanding."
Larry Walsh is chief analyst and chief executive at the 2112 Group