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PAETEC CFO: US LEC The Best Fit




PAETECs Keith Wilson

In mid-August, US LEC and PAETEC Communications announced their plans to merge to for a $1.3 billion CLEC — one of a handful of billion-dollar competitive providers. Just days after the merger, PHONE+ Business Editor Kelly Teal spoke with PAETEC CFO Keith Wilson about becoming a public company, its future M&A plans and industry consolidation. The following is an edited transcript of that interview.

First lets start off by talking about the PAETEC/US LEC merger. Of the CLECs PAETEC could have merged with, why did it choose US LEC?

The companies had a lot of common threads — personnel, customer treatment, churn rates, the customer bases are similar, the networks are similar. Its the best fit we could possibly consider.

This deal means PAETEC finally achieves its hopes of going public. How will being public help PAETEC grow?

Being public doesnt necessarily impact product set per se. Weve received a lot of accolades from the Frost & Sullivans of the world. It will allow us greater financial flexibility to be able to continue to invest both in network and product development and future geographies.

Should more CLECs consider going public?

The primary advantage is financial flexibility. Its a way to potentially reward employees and partners. It also gives you additional flexibility as it relates to potential M&A.

On the downside, youre measured on a quarterly basis, so you have to have confidence in operating performance. You have to deal with SoX legislation, which provides additional cost and requirements for proper controls.

In terms of job cuts, we havent come out and publicly disclosed numbers. Weve said that over next couple years, the combined entity will be a net hirer — more people as a combined company. But there are clearly some redundant functions. Were looking at savings on the network side, looking at redundant expenses and cost structures. Both of us are growing so rapidly that we understand the importance of people and want to make sure we dont hurt the growth of the companies by being short too many people — whether from supporting the channel side to distinctly supporting the customers. Its equally as important.

Its an exciting time for the sector and were really pleased to be a part of it. As a private company we had a much lower profile but performed very well.

Is PAETEC looking at more M&A down the road?

I cant speculate on that. I can tell you that PAETEC and US LEC independently — and we think on a combined basis — will continue to grow organically. From the organic standpoint we can continue to leverage direct sales and channel partners. I think we will continue to be opportunistic in looking at other non-organic opportunities. PAETEC M&A has, in the past, been more product-oriented. We view that as an opportunity as well.

What are likely expansion plans?

Again, I cant comment on that. I think weve said publicly wed like to be in the San Francisco Bay Area in a relatively short period of time. But we need to focus immediately on getting regulatory and shareholder approvals and integrating the two companies.

Does the company have an exit strategy?

Were a buyer and not a seller today, but I do think we are fiduciaries and we have a lot of shareholders. We havent been approached by anybody in terms of selling nor are we actively selling to anybody. I think thats evidenced by this transaction. We view this really as a merger not as an acquisition. Theres a lot of tremendous talent in Charlotte, (N.C.), Rochester, (N.Y.), and a big presence in Orange County.

What is your general opinion of the CLEC market now that there are three billion-dollar companies?

We still dont run into each other that much. Were still taking market share from the incumbents. We occasionally see folks moving from competitive provider to competitive provider. Theres enough room. We just think [CLEC consolidation] is great for the industry.

Scale or niche seem to be common strategies for the CLECs — are those the likely models going forward? Are there others?

We still view ourselves as more of a niche player. The combined entities really focus on medium to large enterprises only. We dont really sell to SMBs. Neither of us has a lot of government business, which I think is an opportunity for folks like us. We dont have any residential services, we dont have any wireless as it relates to cell phone-type services, and were going to be a billion-dollar company. When you compare us to some of the ILECs, were still very small, but were nimble and have better value propositions to customers. Its management team-specific really or business plan specific

Links
PAETEC Communications www.paetec.com
US LEC www.uslec.com

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