Category: Mergers & Acquisitions

The AT&T – T-Mobile Merger: The More Pressing Question

While the proposed merger between AT&T and T-Mobile has raised the hackles of many in the mainstream telecom world, it’s also been met with agreeing smiles from folks we don’t usually run into on the service provider side of the fence.  The Department of Justice, faced with a sharp uptick in the Herfindahl Index – the yardstick used to an industry’s competitiveness – if the merger moves forward, found itself in a position in which it had to raise questions.  Other mobile carriers, led by Sprint, are concerned about being stomped by a cellular behemoth.
Meanwhile, companies such as Microsoft, Oracle, Facebook, and Research in Motion (RIM) have come forward to express their formal support of the marriage, viewing it as a step forward.  Still others, including major players such as Google and Apple, haven’t had much to say about the matter, viewing it as a relatively neutral event from their vantage point. Those opposing the merger are largely concerned about consumer protection issues, such as pricing and quality of service, as well as problem they foresee emerging from further industry concentration.  These issues are focused on specific, well-defined qualities that have direct impacts on consumers and other market participants.  And while they are legitimate concerns that should and will be vetted through established processes, another less tangible issue warrants further discussion outside the regulatory battlegrounds.
The continued acceleration of technological innovation in the mobile communications space continues to make our collective heads spin.  Since its launch in 2007, consumers have snapped up about 130 million  iPhones; Android-based mobile device sales are accelerating even faster.
Total Number of Android Apps Available (2009 – 2011)
Applications (“mobile apps”) extending the value of smart phones even further than most observers imagined are being developed and released at a rate of over 2,000 each day.  These developments are only the tip of the iceberg, but collectively they are  resulting in a “mobile traffic deluge” threatening to sweep away any number of industry participants, all coming  from one community though – the Carriers, while raising the boats of many others.
Mobile Traffic Deluge:  Exploding Backhaul Bandwidth Requirements
So perhaps the more appropriate debate the industry needs to focus on seeks to address the question: “How does this merger – or any other similar transaction among  carriers – help ensure that the mobile ecosystem has the requisite capacity and can provide the exploding bandwidth to keep pace with the rate of innovation end-user devices are experiencing?” That question prompts a re-alignment of industry players in which, for example, Web giants such as Google and Apple leave the sidelines and fall increasingly into conflict with the carriers constraining their growth.  It’s the more pressing question in which everyone in the industry has a stake.
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Telecom M&A shifts from fiber to cloud

At the CompTel Plus show this week, I was reminded of the prediction made at last year’s show that 2010 would represent something of a volume peak for fiber-based mergers and acquisitions. That prediction appears to have been borne out, with dealmakers reporting this week that, even assuming some more transactions before the holidays, fiber M&A in 2011 will be “not even close” to the volume seen in 2010. There simply aren’t as many assets left on the market these days.

As my hastily assembled list indicates, telecom M&A in 2011 shifted more toward cloud-centric services, including hosted communications, particularly after the starting gun of Verizon’s (VZ) $1.4-billion acquisition of Terremark Worldwide in January. (Yes, I know: This list is far from exhaustive. Please feel free to harangue me about the ones I omitted in the Comments section below.) Cloud M&A will continue to hold the spotlight for some time (more on those trends here and here), but even large-scale fiber M&A hasn’t closed its curtains yet; expectations for cable MSOs to buy nationwide fiber networks continue to grow as trade associations lobby regulators for a green light to such deals.

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Frontier’s next big move

Amid a wave of cloud-centric M&A from historically rural carriers large and small – CenturyLink’s (CTL) acquisition of Savvis, Windstream’s (WIN) purchase of Hosted Solutions, TDS Telecom’s (TDS) VISI deal – one carrier we haven’t seen make a cloud acquisition yet is Frontier Communications (FTR). That’s primarily for the obvious reason that Frontier currently has its hands full digesting its last acquisitionVerizon (VZ) wireline properties in 14 states – which closed at the beginning of last year’s third quarter.

As with any telecom carrier, key to Frontier’s success is its penetration of business customers, which contribute 51% of its revenue. But attacking that market – or even retaining it — while assimilating Verizon’s properties has not been easy for Frontier, and the next nine months will be a crucial period for it to make progress.

Before Frontier acquired it, Verizon’s business it was losing about 30,000 access lines per quarter on the business side alone (nearly quadruple that on the residential side). In the long months leading up to the acquisition’s close, as both companies plodded through a politicized regulatory approval process, Frontier could only stand by and watch as cable companies (Comcast [CMCSA] in particular) pilfered those Verizon customers, easily spreading fears that the transition to Frontier would create the kind of horrible service headaches that FairPoint Communications (FRP) saw when it executed a similar deal. (That’s another reason why Frontier had to make the integration of these assets its sole focus throughout this transition before tackling any other new initiatives.)

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Inside the Vocalocity Aptela merger

If you’re like me, when you saw today’s announcement that Aptela was merging with Vocalocity, your first thought was how convenient it is that Aptela and Alteva, two companies in the same space whose names you were sure to keep confusing, were both taken out of the game in the same summer.

Believe it or not, today’s deal has significance even beyond that.

As I’ve documented, M&A has been accelerating in the hosted business VoIP space for a while now — there was another deal just last month — and today’s merger (which technically closed yesterday) adds mass and momentum to that fast-growing snowball. Increasingly, we’re seeing carriers acquiring hosted VoIP providers,
such as TelePacific buying Telekenex, Earthlink (ELNK) buying STS Telecom and CBeyond (CBEY) buying Aretta Communications. But we’re also seeing pure-play hosted VoIP players combine with one another, as we did today.

Because there isn’t a great deal of product differentiation in the hosted business VoIP space right now, M&A among in this sector is typically about acquiring customer bases to build scale and, secondarily, acquiring talent to more effectively compete.

Eight-year-old Vocalocity, which had roughly 11,000 customers and 150 employees, grew by about a third with the addition of Aptela’s roughly 4000 customers and 40 employees (including one important gain in particular: Aptela’s CTO and founder, Mahesh Paolini-Subramanya, who is now CTO of Vocalocity).

The new improved Vocalocity, with nearly 15,000 customers, should have annual revenue

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Fiber-to-the-tower players raise their bets

Carriers building fiber to cell towers are raising their bets, even in an M&A environment that has left them little time to close their wallets. CenturyLink (CTL) and Windstream (WIN), for example, having racked up numerous acquisitions lately, are nonetheless freeing up more funds to chase the wireless backhaul opportunity while it’s hot.

CenturyLink recently raised its spending expectations for the year, projecting capital expenditures approaching $2.5 billion, citing fiber deployment initiatives that had been underway at both Qwest and CenturyLink before the two companies closed their merger. Company executives plan to bring fiber to 6,000 towers by the end of this year, adding more over the next two years (at least). And they now expect a spending surge in the back half of the year to raise the firm’s total capex to 15%-16% of its revenue, following a trend seen among others such as PAETEC
(PAET) and Level 3 (LVLT).

While many large companies are sitting on their cash amid the turbulence of the macro economy, carriers such as Windstream and CenturyLink know that they have to invest now to get in on the current window of
opportunity for offering big bandwidth to operators rolling out 4G speeds. That fiber-to-the-tower landgrab is occurring as data center buildouts are also exploding, allowing carriers to combine purposes and stretch infrastructure across both markets.

Some carriers are already seeing revenue ramp up from these efforts, while some are just signing long-term contracts for future return. Time Warner Cable (TWC) reported its second-quarter wireless backhaul revenue had doubled from a year ago to $34 million. Windstream said its special access revenue was up 9% (or $11 million) year-over-year in the quarter due to backhaul. These contracts typically don’t yield revenue until 6 to 12 months after they’re signed, Windstream has said. But once the money starts coming in, the margins are high because the cost of operating FTTT is low. So players in this game need to be comfortable spending a lot upfront, building out fast, and then being very patient as they wait for the payoff.

For more on where the wireless backhaul market is headed, check out this NPRG report.

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Masergy’s next moves

Masergy is looking for acquisitions to beef up its bottom line following the new injection of capital it will receive from being acquired by private equity firm ABRY Partners. As it’s shopping, the provider of global VPNs and MPLS services would do well to add hosted VoIP and other cloud services to its in-house capabilities, emulating the strategy of several others including Cbeyond (CBEY), which last year acquired both a cloud computing firm and a hosted VoIP provider.

Masergy made the case fairly well for combining its own services with hosted VoIP in the press release announcing its partnership with hosted VoIP provider Thinking Phone Networks: When you blend the benefits of a cloud-based application with the performance quality and QoS controls of a secure, intelligent MPLS connection, you have a powerful package. (Throw in SIP trunking, and customers have a way to get the most of their existing premise-based PBXs.)

But wait, you say: Doesn’t Masergy mainly serve large businesses? What do large businesses want with hosted VoIP? Isn’t that just for small businesses that don’t have their own dedicated IT staff?

On the contrary. Hosted VoIP is not just for small businesses anymore. As I detail in a new report just recently made available (“Hosted Business VoIP: UpMarket Opportunities”), demand for hosted VoIP services is quickly catching fire among businesses with hundreds or thousands of employees.

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Rackspace in three slides

Rackspace Hosting (RAX) set several new records in the first quarter, reporting its highest revenue growth since 2008 and continuing a break-neck pace of expansion that is emblematic of the cloud computing movement itself.

The company added 12,000 new customers, 230 new employees and more than 4400 servers in the quarter, each of which represents a new record (except for employee additions, which the company has exceeded before but not since 2008).

Here’s a look at the company’s current trajectory in three slides:

1. Though cloud services are only 16% of Rackspace’s overall business today (the rest being managed hosting), they’re growing rapidly – 93% from a year ago – driven by a mix of new and existing customers. These latest results were aided by the first full quarter of the company’s managed cloud offering and illustrate some of the upside potential in the cloud.

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CenturyLink Savvis deal demonstrates network’s value in cloud

CenturyLink’s (CTL) acquisition of Savvis (SVVS) illustrates a crucial dynamic in the current convergence of telecom and data center services. As I pointed out in my recent report on this sector, one of the key competitive battles going forward in the cloud space will be between players that bundle cloud services with their own networks and those who promise “network independence.” Today’s deal demonstrates just how important and valuable the network component is for cloud providers, especially those targeting managed services.

On a conference call today announcing the $2.5-billion deal, at least one analyst questioned whether Savvis was getting the best deal it could, citing the 13.5x EBITDA price Verizon recently paid for Terremark Worldwide and the 11x price CenturyLink appears to be paying for Savvis. So what is Savvis getting? For starters:

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CenturyLink, Qwest ramp up spending on fiber for wireless backhaul

Qwest (Q) and CenturyLink (CTL) are both charging fairly hard at the fiber-based wireless backhaul market in anticipation of voracious 4G data needs. But will that market threaten their existing retail broadband businesses?

After the two companies merge in a deal that is now expected to close April 1, Qwest (Q) and CenturyLink (CTL) could end up spending more than $250 million this year to bring fiber to cell towers. That’s based on what each company says it expects to spend separately and could change after the two combine.

  

CenturyLink  expects to spend about $1 billion total as a company this year, up 16% from last year, with essentially all of the increased spending ($135 million) going toward bringing fiber to “close to 3,000” cell sites, the company’s CEO, Glen Post, said on an earnings call today, adding that the company should reach the vast majority of cell sites in its territory by the end, if not the middle, of next year.

Qwest won’t say how much it plans to spend on backhaul but it says it expects to spend nearly $300 million this year on fiber access buildouts, which includes both wireless backhaul and fiber-to-the-node for broadband services. The company doesn’t report spending in each area separately because it tries to pool its efforts, exacting synergies by planning fiber builds with proximity to serve both applications. Qwest says it brought fiber to about 2,000 towers in 2010, having announced contracts to reach that many sites in January of last year. But it has some 17,000 sites in its territory, leaving plenty of runway for growth.

Driving the demand for this fiber backhaul market, of course, are

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How Google Voice was created from a bad hot dog

It was 2006. Craig Walker, a tall, broad-shouldered entrepreneur, was at the VON trade show, meeting with Google (GOOG) executives in the hopes of securing a partnership. A former Silicon Valley lawyer and telecom-focused VC, Walker had sold his previous creation, VoIP service startup Dialpad Communications, to Yahoo! (YHOO) the year before and wanted to talk to Google about his latest venture, another VoIP startup called GrandCentral, which had raised $4 million in funding and would soon launch the public beta version of its service.

Entering the meeting room, Google execs told Walker that he could deliver his pitch to Wesley Chan, who had shepherded the search giant’s popular Analytics service. But Chan didn’t appear to be present. That’s when Walker heard a pained groan from under the table.

Craig Walker, Wesley Chan

A short while earlier, at the Level 3 Communications (LVLT) booth on the show floor, Chan had eaten a hot dog that he soon discovered “was basically poisonous,” he said. Lying on his back beneath the table, he was doing his best to keep it from coming back up.    

Walker, meanwhile, went ahead with his pitch. It helped that he had a great product: GrandCentral’s web-based VoIP platform promised users “one [phone] number…for life” and came with a long list of features that impressed reviewers. But for obvious reasons, he wasn’t optimistic about the meeting.

“The last guy I thought would be interested in my pitch is the guy moaning on the floor,” he said.

On the contrary, though, Chan was interested.

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