COMPTEL M&A Panel: Have We Learned Our Lessons?

By Tim McElligott

COMPTEL PLUS — Panelists participating on a panel at the COMPTEL PLUS Fall Conference in Orlando this week believe the environment for mergers and acquisitions will get stronger next year or the year after, and that it will be good for the market as long as there is no repeat of irrational exuberance.

The panel, “Mergers & Acquisitions: How Do They Impact Supply and Demand in Telecom,” moderated by Kelly Teal, business and regulatory editor for the Telecom Division of Virgo Publishing, included: Dan Caruso, president and CEO of Zayo Bandwidth; Joe Morris, chief operating officer of First Communications; Roger Valdovinos, founder and managing director of Blue Beacon Capital and Ed Vilandrie, director and co-founder of Altman Vilandrie & Company.

Starting from the standpoint that supply and demand for bandwidth are once again in balance and demand is back on the rise, panelists examined the effects of that on further consolidation in the carrier marketplace.

Caruso noted that since 2007 there have been approximately 15 acquisitions of fiber-based telecom companies and that there are only 15 competitive carriers left in the U.S. with at least five thousand route miles of fiber and $75 million in revenue. “Over the next three to five years, there will be another wave of consolidation. The big guys will get together and the number will drop to less than ten,” he said.

Vilandrie said that a lot of the M&A activity that should have happened before the bubble, will start happening in the next six months to a year. A second phase will follow that where companies start going after properties they lack, such as cable companies buying competitive local exchange carriers (CLECs) that are good at selling up-market. A third phase, not necessarily following but potentially in tandem to a degree, will be a rush to fill the “sensational need for bandwidth.”

“There is a huge gap in the network infrastructure that will be required to support what is going on in the wireline and wireless networks,” Vilandrie said.

While those with cash might be tempted to get while the getting is good at the first whiff that the recovery is real, Caruso cautions them to consult their short-term memory. “We lived through the telecom ‘hellcom’ and as investors and operators, we made a mess of our industry and we are capable of doing it again,” he said. “With bandwidth growing as it is, there will be a lot of temptation to spend and raise money like we did before. We have to make sure that as participants in this industry we have reflected on what happened during the telecom meltdown and not make that mistake again.”

Caruso wonders if companies that have been itching for the capital markets to open up will exercise the proper restraint once they do.

Another lesson companies should take to heart is that they cannot rely on a favorable regulatory environment to support their business model. First Communications’ Joe Morris said, “We have learned not to rely on regulatory policy. We have to build business models that are solid despite the administration’s [policies],” he said, adding that some of the applications for stimulus dollars he has seen “give me great pause to see how some of this money will be spent.”

Morris said it also is tempting to try fixing a business problem through M&A, but that is wasn’t the best approach. “It’s tempting, but creating real value is focusing on what you do best. Successful models [for M&A] recently are from folks who just get deeper into their markets. So avoid the temptation to do a deal to fix a problem.”

Going deeper means executing the evolution to selling products and services you never sold before and doing it responsibly, said Vilandrie. Doing so is the right approach to M&A, he said, because M&A should be driven by revenue growth, not cost reduction. “Do what makes sense from a business growth standpoint, not a cost-reduction standpoint. The cost savings will come on its own,” he said.

Asked if international operators would be a driving force behind consolidation in the U.S. market, panels agreed for the most part this would not be the case. Valdovinos pointed out that BT has been very aggressive in this market and that you can’t count out Carlos Slim as a consolidator. “But outside of them, we haven’t seen a lot of international players looking at the U.S. market,” he said.

Valdovinos did speculate on other deals that sounded reasonable, such as Verizon going after the likes of Cbeyond or PAETEC, Comcast going after Level 3 or a Global Crossing–RCN matchup. However it shakes out, Valdovinos said, “There will be consolidation involving large RBOCs.”

Caruso said China might become a bigger and bigger player in the international marketplace, but doesn’t seen any direct signs they want to get involved in any consolidation in the U.S.

Vilandrie, however, said that companies such as Reliance and Tata out of India will begin to place strategic bets in this market.