Second Phase of Carrier Consolidation Begins
By Ken Branson
|Mergers and acquisitions are always described by the people involved as
a "win-win situation" or "the creation of a powerhouse" or some such
superlative. However, things get lost, as well as gained, in a merger.
The business of corporate consolidation used to be simple. In the corporate jungle,
large carnivores ate smaller ones. Occasionally, large carnivores combined and became really
large carnivores. No longer. Now, small companies engulf larger ones; companies acquire
each other across industrial lines, or even international borders.
"We’ve been through the first wave of consolidation in this industry, and we’re
about to start on the second," says John Hodulik, telecom analyst at Paine Webber
Inc., New York. "In the first wave, some of the bigger players focused on other big
players who could give them more bang for the buck. SBC (Communications Inc., San
Antonio), Bell Atlantic (Corp., New York), Qwest (Communications International Inc.,
Denver) and Global Crossing (Ltd., Hamilton, Bermuda) all played that game."
With the recent announcement that Cincinnati Bell Inc. (CBI), Cincinnati, intends to
buy IXC Communications Inc., Austin, Texas, the second phase seems to have begun. CBI,
long an incumbent local exchange carrier (ILEC) in the Cincinnati area, plans to acquire
IXC, a troubled national long distance company, for $3.2 billion. CBI is not acquiring
more of the same; it is making what its executives call a "transformational
transaction," a transaction that will change the kind of company it is entirely. And
CBI is far from alone.
Carriers are rushing to make sure they have the ability to deliver whatever services
their customers want, over whatever distance their customers need them delivered. With
long distance certification apparently just around the corner (it’s still a matter of
opinion how far away the corner is), with liberalization hitting home in Europe and Latin
America, all kinds of carriers need to fill new gaps in their networks and offerings.
"People do mergers for scale, scope and size, or to acquire a competency they
don’t have," says Joseph P. Clayton, chairman and CEO of Frontier Corp., Rochester,
N.Y. "SBC buying Pacific Telesis (Corp., San Ramon, Calif.) or Ameritech (Corp.,
Hoffman Estates, Ill.)–that’s scale, scope and size. Our buying Global Center (Inc., San
Francisco), that was to acquire a competency we didn’t have."
Clayton would know. As CEO of Frontier, he has been in acquisition mode for the past
two years, and in 1999 found himself in the acquisition cross hairs of Global Crossing and
Hodulik thinks Clayton and other would-be mergers and acquirers will be looking for the
assets, as well as know-how, they lack. Cincinnati Bell, for instance, will have to think
about more mergers and acquisitions if it wants to be a major player in a world where
geography means less and less. "CBI has to do something to fill those pipes they paid
all that money for," Hodulik says. "And the answer is local access."
|AT&T Corp.||Acquired Teleport Communications Group Inc. (TCG), TCI Group. Acquistion of
MediaOne pending. Forming international joint venture with British Telecom plc.
|Local access through cable customers (TCI, MediaOne); local service competency
(TCG); key customer base (TCG); size and scope (BT).
|MCI WorldCom Inc.||Acquired WilTel, MFS, UUNET, MCI, SkyTel, Embratel. Has international alliance
with Telefonica, possibly doomed by Telefonica’s changing direction.
|Size and scope (WilTel, MCI), new market entry, new expertise (MFS, UUNET), new
asset (UUNET), new market (SkyTel), international reach (Embratel, Telefonica).
|SBC Communications Inc.||Acquired Pacific Telesis and SNET; acquisition of Ameritech Corp. pending.||Size and scope.|
|Frontier Corp.||Acquired Global Center Inc.||New competency Internet protocol (IP), new market and customer base (web
|Qwest Communications International Inc.||Acquired LCI; tried and failed to acquire Frontier; acquisition of US WEST Inc.
pending. Has international joint venture with KPN.
|Size, scope (US WEST), customer base (LCI), international reach (KPN).|
|Sprint Corp.||Acquired United Telephone; has international joint venture, Global One, with
France Telecom and Deutsche Telekom AG, which seems hobbled by dissension between France
Telecom and Deutsche Telekom.
|Customer base, new expertise and markets (United Telephone), international
reach (Global One).
|Bell Atlantic Corp.||Acquired NYNEX Corp.; acquisition of GTE Corp. pending.||Size and scope, new expertise (data and long distance from GTE).|
|GST Telecommunications Inc.||Acquired Whole Earth Networks.||New expertise (IP, data).|
|Intermedia Communications Inc.||Acquired Digex.||New expertise (IP, data); new customer base (web hosting).|
|Global TeleSystems Group Inc.||Acquired Esprit Telecom plc.||Local access, new expertise (local service).|
|Cincinnati Bell Inc.||Acquisition of IXC Communications Inc. pending.||New expertise (data), new asset (a nationwide, fiber-optic network), new
distribution channel for new services.
|Deutsche Telekom AG||Tried and failed to acquire Telecom Italia SpA; owns Global One with France
Telecom and Sprint.
|Size and scope, international reach.|
|Olivetti SpA||Acquired Telecom Italia.||Size, scope, new expertise, local access.|
Source: Compiled by author
That’s the answer for lots of long distance carriers, for newly liberated ILECs that
want local legs outside their traditional territory and for international carriers. That
may be great news for competitive LECs (CLECs) in North America that have at least the
local access piece of the puzzle. Since none of them has local access everywhere, Hodulik
says they’ll need something else to offer potential acquirers and merger partners. Hodulik
sees three CLECs as particularly likely targets for acquisition: Intermedia Communications
Inc., Tampa, Fla.; GST Telecommunications Inc., Vancouver, Wash.; and e.spire
Communications Inc., Annapolis Junction, Md.
Intermedia and GST have acquired Internet service providers (ISPs). Intermedia’s Digex,
Inc., Beltsville, Md., operates a high-end web-hosting business. GST has a rapidly
expanding fiber optic network up and down the West Coast from Seattle to San Diego.
e.spire, in addition to having a large southeastern footprint, has a construction company,
ACSI Network Technologies Inc., Annapolis Junction, which builds fiber optic networks for
other companies, and makes money doing it. e.spire also has a relatively low stock price,
trading in the $9 to $10 range in late summer.
Teleglobe Inc., Reston, Va., is an example of the new, boundary-leaping style of
acquisition. A carrier’s carrier, Teleglobe wanted to compete in Europe as a pan-European
carrier, and needed what Andrew Burroughs, vice president-global marketing and product
management, calls "a flanking strategy"–residential customers. They felt sure
most of their competitors were weak there.
Teleglobe was not without experience. "We had actually tried to do residential
business in the United States," Burroughs says. "We got a dial-around code and
went after ethnic markets and did fairly well. We decided we could succeed, but it would
take $1 billion to build up the brand equity."
Eventually, they bought Excel Communications Inc., Dallas, for $2 billion. Excel had
3.1 million residential customers in the United States and a marketing process unique in
the industry,. "They sell through multilevel marketing, like Mary Kay,"
Burroughs says. The idea, Burroughs says, is that Excel (Teleglobe still uses the brand)
will export its marketing expertise to Europe and go after the residential market.
"We think this will be hard for (incumbent European carriers) to respond to."
Qwest has been back and forth across all sorts of barriers this year. The carrier’s
carrier formed a joint venture in Europe with the Dutch incumbent carrier KPN, called KPN
Qwest, and announced its intention to build a pan-European network.
Then Qwest offered to buy US WEST Inc., Denver, and Frontier for more than $60 billion.
Global Crossing had already secured the agreement of both companies’ boards of directors
to acquire them. In the final compromise, Qwest got US WEST and Global Crossing got
Frontier. That’s fine with Clayton.
"I couldn’t figure out how we fit into that Qwest deal because we had overlapping
assets," Clayton says. "Well, maybe there would have been a new competency with
(Frontier’s) data centers. But I just didn’t get it."
Sometimes, mergers and acquisitions don’t seem to make sense, at least at first.
Burroughs, for example, still doesn’t understand why either Qwest or Global
Crossing would want to merge with US WEST.
"They (US WEST) have these huge open spaces, the requirement to deliver universal
service, states with small populations," he says. "It (Qwest/US WEST) hasn’t
been strongly endorsed by the market, has it?"
Clayton, not a shy man, held his peace with some difficulty while the Qwest/Global
controversy played itself out. He still doesn’t get it.
Mergers and acquisitions are always described by the people involved as a "win-win
situation" or "the creation of a powerhouse" or some such superlative.
However, things get lost, as well as gained, in a merger. Bernard Ebbers, CEO of MCI
WorldCom Inc., has used his share of superlatives in more than 50 acquisitions in recent
years. This summer, when MCI WorldCom’s frame relay network went down, Ebbers laid some of
the blame on the effects of consolidation–not his, but that of his vendor, Lucent
Technologies Inc., Murray Hill, N.J. The software that went awry, Ebbers said in a
conference call, was developed originally by Cascade Communications, which was bought by
Ascend Communications Inc., Alameda, Calif., which was bought by Lucent.
"And so one of the concerns obviously in this cycle of events is what happened to
the people and the process that did the development and wrote the software?" Ebbers
asked. "And was the capability to maintain this software retained through these
Consolidation doesn’t always mean merger or acquisition. The third option is the
alliance. The word is almost Churchillian, but the reality is often nobody’s finest hour.
Think of Global One, the alliance between Sprint Corp., Kansas City, Mo., Deutsche Telekom
AG, Bonn, Germany, and France Telecom, Paris. Something less than smooth to begin with, it
now appears to be foundering in Franco-German snarling over Deutsche Telekom’s failed
attempt to acquire Telecom Italia SpA, Rome. Think of Concert, which began with MCI
WorldCom allied to British Telecommunications plc (BT), London, and now is entirely BT’s
property in the wake of BT’s failed attempt to buy the former MCI. Think of Telefonica
S.A., Madrid, and MCI WorldCom, yoked together and drifting apart because, as an MCI
WorldCom spokesperson puts it, "Telefonica has that alliance with IDT (Corp.,
Hackensack, N.J.) and seems to be going in a different direction."
That alliance–in which IDT, an ISP and Internet protocol (IP) telephony company, will
form a joint venture with Telefonica and buy into its Latin American submarine cable
project–may be an exception that proves the rule. Burroughs says alliances fail because
"they have different networks, different billing systems, different switches. They
can’t do products together. Unless there’s one entity that makes decisions and has real
skin in the game, they fail over time." IDT and Telefonica have made it clear that
Telefonica will manage their joint venture, which will target Spanish-speaking customers
in the United States.
Perhaps the only certainty about consolidation is that many people who thought they
understood it all may find themselves agreeing with Clayton’s observation about the
Qwest/Global Crossing/US WEST/Frontier dance. "This was something they just didn’t
teach us at business school," he says.
Ken Branson is business and finance editor for PHONE+ magazine.
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