Agents Bullish on Speakeasy Deal

Agents told PHONE+ they are optimistic about the potential for the planned merger of Speakeasy with Covad Communications Co. and MegaPath Inc. a combo that creates a stronger company in terms of scale, product breadth and channel-friendliness.

The transaction, announced June 10, will combine Speakeasys small business voice and data services with MegaPaths services for distributed enterprises, and make them available over Covads nationwide broadband network. The combined privately-held company is expected to have annual revenues greater than $500 million.

The [deal] is welcome news for Telarus, and I think all agents in the channel, said Patrick Oborn, vice president of marketing for master agency Telarus Inc., which represents both Covad and MegaPath. Now, with one contract, agents will have access to Speakeasy’s great access and hosted VoIP products, Covad’s huge footprint and MegaPath’s superior managed network.

He said each company fills an important niche for agents selling IP communications and access solutions.
Most importantly, it allows agents to sleep at night knowing that the financial stability of three huge carriers just got a bit more solid, he added.

Greater scale a stated objective for the merger is appreciated by the agents. I think it makes sense for these companies to merge to leverage a greater footprint and buying power to survive, said Cameron Larson, principal for Astound Communications.

Many agents’ reaction to the news was to ask, who is next to join the threesome?  Wild speculation among agents ranged from New Edge Networks to XO Communications Inc.

In fact, the merged company does have plans to grow organically and by acquisition. Dan Foster, chief sales and marketing officer for MegaPath, said, at more than $500 million  $310 from Covad, $150 from MegaPath and the rest from Speakeasy the merged entity is on its way toward its goal of exceeding $1 billion. There it will join CLECs, such as XO, PAETEC, and Level 3 Communications Inc.

For agents, the increased scale is only matched in importance by the channel-friendliness of the new service provider.

Although we’ve never worked with Speakeasy, we’ve been very happy with MegaPath and Covad in the past, and expect Dan Foster to cobble together a Mega-Program for agents that combines the best practices of all three, said Telarus Oborn.

Foster told PHONE+ more details about the combined channel will come following the deals close, which is expected in third quarter. However, he said, the plan is for the indirect sales channel to contribute 30-40 percent of the companys revenue.

He said there is an overlap among the channel partners for Covad and MegaPath, but not as many with Speakeasy, which had a referral-type channel model with more than 8,000 IT solutions providers. He expects the new company to maintain both channels.

In addition, Foster said the new program will have the advantage of MegaPaths customer-facing tools and Covads back-office tools.

In addition to the traditional indirect sales channel, the retail channel vis a vis Best Buy will remain intact to some degree. Best Buy, which acquired Speakeasy in 2007, will continue to be a minority investor going forward.

Speakeasy CEO Bruce Chatterley said Best Buy and the new CLEC would continue to collaborate. I cant commit to you that all the tests and trials that we are doing will continue, but theres no plan to discontinue those things based on this merger, he said. Best Buy is trialing retail sales of the Speakeasy service in certain East Coast stores.

In addition, he said Speakeasy has a channel relationship with the Best Buy for Business outside sales team on a national basis. These sales reps get leads from small businesses shopping at the retail stores, which they then pursue face-to-face. He said that program has been very successful for Speakeasy.

Where agents and analysts alike have expressed concern is the coming integration of the three companies.
Its always risky to have several mergers at one time as weve seen, said Judy Reed Smith, CEO of ATLANTIC-ACM, recalling the difficulties Level 3, for example, had when it took on as many as seven acquisitions at once.

Mergers are difficult to begin with, let alone when entities try to string them together, added analyst Craig Clausen, executive vice president for New Paradigm Research Group. None of the three involved have any deep experience in M&A activity and the integration process that follows. They’ve got their share of work ahead of them to make this work.

Keeping sales channels excited and engaged may be a challenge during this time, noted one observer.
Foster said the integration will be aided by the fact that MegaPath and Speakeasy are the top two Covad customers.

Upon closing, the companies plan to continue to serve the market through two divisions: a wholesale operating division and a direct, commercial division most likely Covad and MegaPath, respectively, but branding may change when the deals close. MegaPath CEO Craig Young will become executive chairman of the combined businesses. Covad CEO Pat Bennett will continue in that role, managing the wholesale business, and reporting to Young. Chatterley will be president of the commercial unit in charge of all non-wholesale customer sales and marketing division.

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