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Q&A: What Birch-Cbeyond Means for Telecom Sector, Indirect Channel

By Kelly Teal
April 22, 2014 - News

**Editor's Note: Please click here for Channel Partners' complete coverage of Birch's pending acquisition of Cbeyond.**

Two analysts who have tracked the telecom and CLEC industries for more than 15 years each hold different takes on what the Birch Communications acquisition of Cbeyond means for the sector in general and the channel in specific.

Channel Partners asked Craig Clausen, executive vice president and principal analyst of New Paradigm Resources Group (NPRG), and Brian Washburn, service director at Current Analysis, for their insights into the $323 million, all-cash deal, announced on Monday.

Here's what they had to say:

Channel Partners: What do you think of the Birch-Cbeyond deal, in general?

NPRG's Craig ClausenClausen: This is a good deal for both companies. The valuation is fair to both sides – providing Cbeyond with the appropriate size premium (i.e. no tremendous multiples) while providing Birch with a value it can absorb without becoming exposed. The relative sizes of the two companies doesn’t affect this deal: Birch is now in a position (after some 20 or so other acquisitions) to effectively integrate a larger carrier and Cbeyond isn’t so large that such an integration becomes an albatross for Birch.

Perhaps most importantly, though, this acquisition again reflects the importance of scale in telecommunications. While both companies have a nationwide footprint, the density of this footprint is less than even. This acquisition evens out that footprint, not only in terms of geographic reach, but also in terms of network infrastructure and services offered.

Current's Brian WashburnWashburn: In general, I think it's an okay fit. Birch mainly focuses on the lower end of SMBs and it has been acquiring a long list of these types of providers (most of them much smaller) to shore up a customer base.

As Birch is privately held, we've had little visibility into the company's overall performance. I'm somewhat surprised that Birch got commitments for $323 million cash for this acquisition so easily. But we were expecting someone to bid for Cbeyond even before the company itself stated it was evaluating strategic alternatives, just based on the low stock price for a service provider with a series of interesting developed products, carrying virtually no debt. Yes, the EBITDA ratio for the acquisition is out of whack, but Birch could make the Cbeyond acquisition be transformative to its business.

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