Consolidation or Bust!

Posted: 09/2002

Consolidation or Bust!
Powell Might Like Bell-IXC Mergers,
But Bells Are Wary

By Fred Dawson

CHAIRMAN MICHAEL POWELL’S recent suggestion that acquisition of WorldCom Inc. by
an RBOC might be a good idea was widely condemned by many in the telecom
industry as another sign that the fix is in on a Bush administration policy
favoring monopoly over competition. On this point at least, they may have little
to be worried about.

Powell signaled he is ready to break
with standing policy against such mergers in an interview reported by the Wall
Street Journal
on July 15. He suggested the drastic solution to bailing out
the second-largest interexchange carrier was an appropriate remedy at a time
when the telecom industry finds itself in a state of "utter crisis."
Powell also told the Journal the commission might have contributed to the
crisis with policies that encouraged a rapid increase in the number of
competitive carriers.

"The last thing competitive
carriers need at this moment is for leading policy makers to imply that more
consolidation, especially between the Bell operating companies and major IXCs,
might remedy the industry’s ills," said Walter Blackwell, president of the
Association of Communications Enterprises, in a statement released on the day
the Journal article appeared. "Such high-level speculation could
further undermine the ability of competitors to gain a secure foothold in the

Uncertainty about what to expect
next from regulators is making life difficult for competitors like US LEC, a
Charlotte, N.C.-based integrated communications provider serving mid- to
large-sized businesses in the Southeast and Mid-Atlantic, notes Wanda Montano,
vice president of regulatory affairs at US LEC. "We’re doing very well at
weathering the telecom storm, but, from a regulatory standpoint, it’s a game of
shifting sands," she says.

The notion that RBOCs could take a
shortcut into long distance by acquiring IXCs is disturbing, Montano adds, not
only because of the monopoly implications but also because such acquisitions
could undermine the protections accorded competitors under the Telecom Act. The
Section 271 process, through which Bells gain entry into long distance via
separate subsidiaries if they meet 14 conditions for opening their networks to
competitors, provides for a review three years after the 271s are granted, she
notes. "They must show they’re conforming to the act before they’re allowed
to merge the long-distance subsidiary into the parent, and that’s an important
protection that would be circumvented in a Bell acquisition of an IXC," she

While competitors may view such
mergers as threatening, the idea that consolidation between the ILECs and IXCs
will save the telecom industry is being touted by a widening circle beyond
Powell as the preferred alternative to what these observers view as an
increasingly likely scenario that goes by such names as "Apocalypse
Now" and "The Catastrophe Scenario." Hereby the fear is that the
telecom meltdown will send one or the more Bells into bankruptcy and that no one
among the carriers left standing will be financially strong enough to take over
the failed company.

all of these ideas are well outside the perspectives the Bells themselves appear
to hold on the best ways to get through the telecom mind fields. They scoff at
the notion they’re headed for collapse and dismiss the idea that acquiring
WorldCom or any other major IXC would be a good idea at this point.

BellSouth Corp., for example, is in
no danger of collapse, notwithstanding outstanding debt in the neighborhood of
$20 billion and a disappointing second quarter, says spokesman Jeff Battcher.
"We’re projecting we’ll have over $6 billion in free cash flow by the end
of 2002," he says, noting that number includes accommodation for stock
buybacks this year totaling $2 billion and retirement of $2.5 billion in
long-term debt.

While declining to comment directly
on the possibility of a move to acquire an IXC, Battcher says the high debt
carried by IXCs and low costs of leasing long-distance lines don’t add up to a
case for acquisitions. "I’d find it hard to believe that BellSouth would
use our assets to purchase one of these carriers when we can play the market for
long-distance transport to our advantage as needs arise," he adds.

One measure of just how unattractive
owning a long-distance carrier has become to the RBOCs is the recent decision by
Verizon Communications not to re-integrate Genuity, which was spun off from GTE
when it merged with Bell Atlantic, as it had once indicated it might. While
Verizon said it would continue its commercial relationships with Genuity, the
decision, which also means Verizon will not be obligated to make further loans
to Genuity, triggered an announcement from Genuity that it might be forced into

Even at bargain share prices the
prospects of owning a massive long-distance network footprint doesn’t make sense
right now, notes Bob Varettoni, spokesman for Verizon. "Leasing is very
attractive these days versus buying someone out," he says.

As Varettoni notes, conditions could
change, forcing the Bells to rethink the merits of going into long distance
alone versus acquiring an existing player. But, for now, Bell competitors may
have less to worry about on the M&A front than they do in other areas of FCC

In fact, the most worrisome aspect
of what Powell had to say in mid-July might be the comments about the impact of
too many competitors on telecom as a whole. These words and similar views voiced
by commissioner Kathleen Abernathy were the focus of a letter sent to Powell on
July 19 by Russell Frisby Jr., president of the Competitive Telecommunications
Association and John Windhausen Jr., president of the Association for Local
Telecommunications Services.

"We are extremely concerned by
recent statements made in the press by Commissioner Abernathy and you suggesting
that the current turmoil in the industry is the result of excess entry by
competitors into local markets and alleging that Commission policies opening
these markets are responsible," they wrote. The real problem, they stated,
was failure of the commission to complete "its task of removing all

The two association leaders blamed
this failure for the "critical problems in our industry" and urged the
commission to take several actions along these lines, starting with issuance of
a statement "reaffirming its commitment to the development of local
telecommunications competition." They said the commission should freeze
action on its broadband initiatives and the triennial review of its unbundled
network elements policy until it completes various pro-competitive proceedings
having to do with performance measures on UNE access and other issues.



of Communications Enterprises

for Local Telecommunications Services


Telecommunications Association






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