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Mergers Still Lagging Expectations

The competitive telecom industry is continuing down a path to consolidate and improve operations, leaving behind the heap of debt and heavy losses that crushed investors, and left startups bankrupt during the late 1990s and early part of the 21st Century.

Chief executive officers, Wall Street analysts and other telecom executives emphasize consolidation is necessary to strengthen the competitive industry, yet there are fewer mergers and acquisitions than many observers had anticipated. Financial experts today will discuss reasons for the delay as part of their examination into mergers and acquisitions, valuations and the capital markets.

Qazi Fazal, managing director with Miller Buckfire Lewis Ying & Co., an independent investment bank advising the competitive industry, says there are a number of reasons for the lag in mergers and acquisitions. For instance, he cites disagreements over which executives will lead a combined company and discrepancies over the value of a company between buyers and sellers.

Everyone thinks they are a better company than the other person, says Fazal, who is a scheduled speaker on the panel.

Another setback: some companies are still carrying a substantial amount of debt.

More often than not, one part or the other has … some leftover leverage from a few years ago that gets in the way of getting deals done, Fazal says.

Still, he and others are confident these hurdles will be overcome over time.

The industrial logic of doing a deal is so compelling that at some point an acquirer has to make a leap of faith, Fazal says.

The good news, finance experts say, is that companies are becoming stronger and beginning to generate free cash flow, a coveted metric on Wall Street. Numerous private companies report generating free cash flow, although publicly held telcos like ITC^DeltaCom Inc. and XO Communications Inc. are posting losses still.

While investors look at revenue and EBITDA (earnings before interest, taxes, depreciation and amortization) to value a company, Fazal says the most important metric in determining valuations is based on cash flow and projected cash flow.

He says financing is available for companies that can demonstrate consistent cash flow and other characteristics that investors esteem, including a solid customer base and manageable churn.

Theres so much money floating out there looking for a place to put be to work, he says.


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