Hi Mike,
".. to help create buying opps for the big brokerage houses.. "
Perhaps those numbers aren't overdone to the extent that they seem to be, on the surface. "Telecom gear" covers a lot of ground, and sometimes it's difficult to separate the perceptions of value vis a vis traditional hardware platforms from software, as a function of historical metrics, with the backdrop of today's plummeting pricing of "services."
Most services that were once supported almost exclusively by backwards-compatible "hardware" platforms are now coming into existence within newer service providers' architectures using frameworks that are almost entirely "software" defined. It's been a subtle shift over time, but one that is now easier to see when you compare today's access and transport platforms to those of just five or six years ago. Every day another brick falls from the wall.
Cannibalization, fostered by the Moore effect, Web-enabled platform substitutes, and other innovations, coupled with deregulation and increased choice (and the pain of churn) have made it plenty tough for legacy-system-burdened incumbents, and cash-strapped startups, to maintain margins, or even reach EBITDA breakevens, respectively.
Which only engenders more spending on sharper razor blades, not less, for those who can foot the bill. The following paragraph is from the article posted below:
"These carriers also have to grow their businesses in what can be a prohibitively expensive market to enter. "The financial infrastructure of a telephone company is up-front capital intensive. It's really expensive to build out the central office," says Weitzberg, who adds that the money is still available but tougher to come by. "I would say it's tougher than it was six months ago but definitely not impossible. You have to have a better plan than just being a CLEC."
I think that it is reasonable to expect that this race of continuing mobilization towards faster, better, cheaper yady ya technology will lead to a trend towards attrition and consolidation, where the less endowed CLECs and weaker incumbents can no longer afford to compete. Both from financial and technological weaknesses.
And some, due to pure thickheadedness and a lack of desire to move forward into uncharted waters, after decades of inertia -- of the type generally characterized by objects which are otherwise immovable.
In the latter, we'll likely see, IMO, the selling off by Incumbents (or effectively delegating through "mergers" or other forms of investments) of certain service sectors that are handled more economically by surviving smaller, more nimble firms whose principals grew up using PCs in grade school. Maybe the vision that defines ILECs and larger CLECs as co-custodians of Layer 1 provisions -- at least for certain types of services and facilities -- is not so far off.
Who knows. A reduction in the number of players may cause a leveling off of rates that could serve to offset the lower margin trend at some point, or even an increase in those rates in some instances (not very likely, tho, not for commodity types of services), at some point in time, for those who are left standing.
Bernard posted a piece on the Broadband Wireless thread that makes some of these points, at least for the CLEC sector. I'll re-post it here, with thanks going to BL for the find:
teledotcom.com
Enjoy, FAC
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Particles to Partners
The great competitive carrier consolidation may be under way. As usual, it's a money matter.
by Jonathan Collins. Jonathan Collins is senior editor/wireless for tele.com. He can be reached at joncollins@cmp.com.
Size might not be everything. But a growing number of competitive local exchange carriers (CLECs) have discovered that mass matters, especially in this market where both public and private financing is increasingly reluctant to embrace the puny. The question they now face is not whether to bulk up but how. Mergers and acquisitions (M&As) seem to be the choice du jour.
The reason is simple--and in line with why other carriers have sought partners at breakneck speeds in recent years. It's the fastest way to expand geographical reach, grab more customers and in turn generate additional revenue, all of which is designed to attract investor interest to support additional buildouts and expansions.
It's way too early to judge whether the strategy will pay off with new investments. What's clearer is that the by-product of the financial squeeze is the long-awaited consolidation of facilities-based CLECs.
"Everyone is talking about CLEC mergers," says Peter DiCaprio, a principal at Thomas Weisel Partners LLC (San Francisco). And with good reason: "Those small players that get left behind will see their businesses erode away. Sooner or later, they will be forced to sell or consolidate in some way."
Sooner has arrived for a sizable portion of CLECs. After several years marked by competitive carriers just trying to establish themselves and operate individually, more than a dozen have struck deals to band together in the last six months. With only about 150 facilities-based CLECs now operating, that means M&As have recently affected more than 10 percent of the market. And the trend is only expected to grow as CLECs scramble for financing and survival. "You don't need to be a hundred billion-dollar company to compete with SBC," says Bob Taylor, CEO of Focal Communications Corp. (Chicago), "but CLECs do need the size to survive long-term."
Size can be achieved exclusively through buildouts. And that takes not only money but time. Many of these carriers are worried that even if they have the bucks, they don't have the time. "CLECs are finding that in order to cover the larger territories, it doesn't pay to build another set of facilities. Merging saves them time and money when they can combine rather than duplicate facilities," says Andy Weitzberg, vice president and general manager at the small CLEC Metcom Access Inc. (Plainview, N.Y.).
The message is being heard by all types of CLECs, says DiCaprio. But some, like those carriers looking to expand services as well as reach, are listening more closely. "The BLECs [building CLECs] are selling mainly data services today. But that will morph into voice, too, because voice will always be lucrative for the guys that do it right. Meanwhile, the voice CLECs need to get the kind of customer access that the BLECs are developing," DiCaprio says.
June certainly saw this type of movement. Just days apart, two mergers were announced that saw smaller CLECs trying to win some of the size and pull of their larger competitors. Gabriel Communications Inc. (Chesterfield, Mo.) announced a deal to merge with TriVergent Communications Inc. (Greenville, S.C.) that will transform the two small operations into a single facilities-based CLEC reaching 40 markets in 16 Midwestern and Southeastern states with some 25 million addressable lines and 450 colocations in service. "The reality is we all know the telecommunications business is one of scope and scale," says David Solomon, CEO of Gabriel and the future combined company, which has yet to be named.
Just days before Gabriel and TriVergent announced their merger, Cavalier Telephone LLC (Richmond, Va.), Conversent Communications (Marlboro, Mass.) and Florida Digital Network (FDN, Orlando) announced their plans to merge and form a new company dubbed Elantic Communications Inc. to serve customers along the East Coast from Maine to Florida. Along with reach, Elantic hopes its merger will give it the muscle to better attack Verizon Communications (New York). It plans to have 14 installed switches with equipment in 417 colocations in 16 markets by year's end. Combined, the two companies support 1,500 miles of fiber and have a revenue run rate of $47 million.
The concept of CLEC consolidation isn't new. It has been predicted since the Telecom Act of 1996 cleared the way for these carriers to spill onto the market. But the fact that two should happen in a matter of days underscores that more than just the traditional drive toward size is pushing consolidation now. "Mergers make sense now because the market is down on CLECs, and so they can't go public to get the money they need," says Craig Clausen, senior vice president and chief operating officer at New Paradigm Resources Group Inc. (Chicago).
Most CLECs have learned this lesson in just the last six months. In March, nearly all those that had made their way to the public markets--including McLeodUSA Inc. (Cedar Rapids, Iowa), Allegiance Telecom Inc. (Dallas), Intermedia Communications Inc. (ICI, Tampa, Fla.), e.spire Communications Inc. (Annapolis Junction, Md.) and Focal--beamed as their share prices hit new highs. Their shares have fallen sharply since then, and so has investor interest in them.
FirstWorld Communications Inc. (Greenwood Village, Colo.) is a case in point. Since hitting the market in March, it climbed as high as $38.75 per share but dropped to less than $5 by mid-July. It wasn't alone: CapRock Communications Corp. (Dallas) saw its share price tumble from around $58 in March to just over $4 in July.
Some observers maintain that these extreme gyrations aren't entirely representative of the CLEC industry because they reflect the weak business plans of the companies involved. Yet even larger and well-established players like Focal, Allegiance and ICI have seen their share values drop by up to 50 percent since early March.
The fleeting investor interest has done more than just promote the need for CLEC consolidation. It has also made it more affordable for some of the smaller, privately held CLECs. "Until recently, valuations have been so sky-high that it did not work for consolidation," says Gab- riel's Solomon.
Now they will have to work just to survive, which may be increasingly difficult as investors watch performance trends more closely. "Inability to get funding is a big issue right now. As the competitive industry grows, Wall Street's ability to pick the winners and the losers becomes easier. Those that can get funding will continue on, while those that can't will have to look for other ways to continue," says Taylor.
Small and midsize operators that have decided to hold off on trying to tap the public markets for now are faced with the challenge of attracting short-term venture capital. That type of money usually surfaces on the promise of high returns that come through mergers or a well-scored initial public offering (IPO). "For the private CLECs, mergers are a way to get the interest of the public markets. They need to see a pick-up in the sentiments of the market toward CLECs and in the meantime do what they can to remain attractive," says DiCaprio.
These carriers also have to grow their businesses in what can be a prohibitively expensive market to enter. "The financial infrastructure of a telephone company is up-front capital intensive. It's really expensive to build out the central office," says Weitzberg, who adds that the money is still available but tougher to come by. "I would say it's tougher than it was six months ago but definitely not impossible. You have to have a better plan than just being a CLEC."
CLECs may not need enough funding to go head to head with the incumbents, but the cash requirements of building out services are still significant. It's also more likely to come to those competitive carriers that can show they are growing, which is why mergers are so attractive.
They help create stronger larger companies with the kinds of balance sheets that will woo investors. "Venture capital is still there as long as there is growth. At the moment, it is just looking a little harder at these guys, and a consolidated broader regional scope makes a CLEC more attractive to venture capitalists," says Clausen.
Ironically, not all CLECs are racing toward mergers to attract venture capital. Some are being pushed toward hook-ups by venture capitalists (VCs) that already hold a sizable stake in them. "The VCs that invested a lot of money into this market 18 months ago were looking for a quick takeout. Now that the IPOs can't happen, they are struggling to find new ways to get that return on their investment. A lot of deals are a direct result of the VCs," says DiCaprio.
The Gabriel deal is one such deal. "We were looking at a bunch of potential acquisitions that we had been made aware of by our venture backers," says Solomon. Such enthusiasm from the existing CLEC backers is not unusual, say analysts. "The VCs have a vested interest in seeing their capital grow. They are scanning the horizon far more than the guys on the operations side," Clausen says.
Nevertheless, not everything about mergers makes for an easier financial ride. Some readily admit that while mergers may grow a company's footprint or access to capital, they also create more demands. "I don't think there's a whole lot of synergy savings when two companies combine because the business plan becomes twice as big, as well as the capital needs," says Taylor.
But mergers have other advantages beyond money. "Mergers absolutely make companies better businesses. They get to compare best practices with learned past experiences," Clausen says. "There are equipment savings because the bigger you are, the brighter your future is and the kinder vendors treat you. But that is second to the chance of developing better business practices."
With so many factors combining to pull CLECs toward mergers, the appeal to cut new deals is hitting the entire CLEC market, say analysts. The result could be a flood of mergers among both large and small CLECs that would make the activity of the last six months look pathetic. It could also help spring the market into a new range of mergers: Traditional CLECs might start acquiring wireless operations and vice versa, with data CLECs and a new generation of building CLECs looking to cross-pollinate.
"We still see all kinds of mixes happening--for example, NextLink buying the largest LMDS [local multipoint distribution service] license holder when before that it had been a pure wireline play, or WorldCom investing in MMDS [multichannel multipoint distribution service] companies, or Intermedia diversifying into the local loop," says John Windhausen, president of the Association for Local Telecommunications Services (ALTS, Washington, D.C.).
Behind the action already taken, plenty of thought has been given to new types of mergers. Solomon notes that before Gabriel cut a deal with TriVergent, his company was looking at acquiring a data CLEC in order to take it into the digital subscriber line (DSL) market. The acquisition didn't happen, but that doesn't mean one like it couldn't take place in the future. "At the turn of the year, we looked at whether to acquire a DSL-only organization. But prices at that point distracted. So we migrated our own space and rolled out our own. But if we saw an organization with a group of products and it was additive to our customer base, we would now consider another acquisition," says Solomon.
One thing that the merger fever hasn't done is actually reduced the overall number of CLECs in the market. When the Telecom Act came into being and set out requirements for the incumbents to open their markets to competitive carriers, there were 48 CLECs, according to New Paradigm.
At that point, these carriers had no access lines and $2 million in revenue from access services only. The group now reports there are about 150 facilities-based carriers with another 50 planned. They currently serve 11.8 million access lines with revenue last year totaling $28.5 billion.
And just as the market is expanding, the number of CLECs is growing in the face of consolidation. "The most interesting trend is that there are still wild numbers of companies entering as startups," says Windhausen. This expansion might bring all sorts of new pressure and perhaps some opportunities, but it doesn't necessarily mean the rush of new players will dry up what private financing is left. "Any present lack of enthusiasm [among the venture capitalists] is unlikely to persist because the fundamentals of the CLEC market still continue. The reality is that new players with bundled offerings can win valuable business," he says.
In the meantime, the CLEC industry is--or at least should be--set for further transformation as M&As create a new consolidated generation of CLEC players. Tight money and good business sense probably demand it. But so will the pack mentality that has shaped much of the communications industry over the last five years.
Once a few companies start merging and perhaps reaping benefits from size, a lot of other carriers are bound to follow. Even if the business model fails to work for them, chances are they'll come under increasing pressure from both public and private investors to follow the lead of other CLECs. If that doesn't push them along, then happenstance just might. There simply could be so many CLECs out there in the next few years that they might not be able to help running into one another. Call it fusion by chance.
teledotcom.com |
