Merger mania promises fewer, bigger telcos

(continued from previous page)

So why are all the Bells after long-distance partners? Though deregulation lets the Bells compete in most parts of the United States, they're all still regional players. The lack of a global or nationwide network makes it difficult for the Bells to compete for the largest corporate customers, which have offices all over the globe.

Grabbing AT&T or MCI also would give a Bell buyer a new revenue base of corporate customers. In regions where the networks overlap, they can also save by consolidating functions. And they can eliminate fees that they had to pay to long-distance carriers to carry their traffic over their backbones.

Can you hear my bid now?
Though all the Bells have motivation to seek mergers, not all suitors are created equal.

Verizon and BellSouth are viewed as top picks for MCI, while Qwest is seen as the least desirable.

As in the case of the other Bells, Verizon has seen revenues and subscription for its traditional local telephone business decline. In 2004, Verizon lost 2.5 million wireline customers, finishing the year at 53 million. The company has offset these losses with growth in DSL and Verizon Wireless. It's in these two businesses where Verizon plans to stake its future.

"Verizon is the only wireless player without an enterprise customer base."

--Telecom analyst Brad Wilson

On the one hand, acquiring MCI seems like it wouldn't fit into Verizon's strategy to focus on its DSL and wireless businesses. Verizon has already taken a huge gamble by putting billions of dollars into building speedier fiber-optic lines into peoples' homes to deliver TV programming, high-speed Internet access and voice calling over one line into homes. Buying MCI would seem to take the company in the opposite direction, toward its traditional voice business. But MCI's enterprise customers could also help Verizon grow its wireless business.

"All the wireless carriers want to sell to corporate customers," said Legg Mason's Wilson. "Verizon is the only wireless player without an enterprise customer base."

Plus, MCI is cheap. Qwest has bid about $6.3 billion for it, according to reports. What's more, thanks to the company's $11 billion bankruptcy last year, MCI is practically debt-free.

"We technical folks always talk about the quality of the network and the international reach," said Frank Dzubeck, CEO of Communications Network Architects, a telecommunications consultancy in Washington, D.C. "But it's really about the financials. The company has zero debt. That alone has potential acquirers drooling."

Some analysts say they don't think that Verizon really wants to buy MCI, but the merger between SBC and AT&T has forced the company's hand.

"I think it would be a defensive move," Wilson said. "They'd rather spend a few billion to keep it out of the hands of a competitor."

Or spend the big bucks on Sprint
Verizon is also said to be eyeing Sprint. Unlike MCI, Sprint offers an extensive wireless network that could fit in nicely with Verizon's wireless network.

Sprint, which has typically played third fiddle to AT&T and MCI in the long-distance market, will probably be the only long-distance provider to escape the market consolidation with any semblance of value for shareholders. Unlike the other two, Sprint has successfully transformed itself over the years into a top-tier wireless provider.

"I bristle whenever I hear we're the nation's No. 3 long-distance company," Sprint Chief Executive Gary Forsee said recently. "We're not."

It's more than that. Today, more than half of Sprint's revenues come from sales of phones, voice minutes and wireless data plans. Those figures will only grow when its $31 billion deal for Nextel closes.

But Sprint's very success invites regulatory trouble, since a combined Verizon Wireless and Sprint would have more than 50 percent of the cell phone market in some cities, including New York.

"There would be significant regulatory risk if they went after Sprint, much higher than what Sprint-Nextel faces," said David Kaut, equity analyst at Legg Mason. "The government doesn't like it when an already No. 1 guy merges with the No. 3 guy in the market."

Plus, there's the Nextel penalty. A deal with Verizon would almost certainly scuttle Sprint and Nextel's $31 billion merger, announced in December. The breakup fee alone would cost about $1 billion, on top of the price tag for Sprint's wireless and long distance IP networks--about $50 billion, analysts estimate.

Quiet...too quiet
BellSouth could also be a potential buyer for MCI. But so far, the company has stayed on the mergers and acquisitions sidelines.

"BellSouth's just been too quiet," an industry source said. "They must be freaking out because their three competitors are making moves."

Some analysts have suggested that BellSouth and Qwest may get together if Verizon makes a play for MCI. But others say Qwest has nothing to offer BellSouth. And they think BellSouth would be better served teaming up with a wireless provider, such as Sprint. With AT&T's network assets, SBC will now become a key competitor to BellSouth in certain regions, which could strain its partnership in Cingular. BellSouth owns a 40 percent stake in Cingular and SBC owns 60 percent.

But Sprint would likely be too expensive for BellSouth. And a combined Sprint/Nextel would have little use for BellSouth's local access lines.

Starts with "c," rhymes with able
Cable operators can't be counted out of the merger picture, and Sprint may be their best focus.

The new full-service, nationwide carrier that's emerging first took root with cable companies, which embraced a new technology for shifting phone calls off traditional local networks and onto the Internet. The new tech--voice over Internet Protocol (VoIP)--allows them to all but give away long distance and local calling in their service bundle in a major challenge to Verizon, Qwest, BellSouth and SBC.

"The circle will now be complete," said A.T. Kearney Vice President Alex Lui. "God gave us mobility, ubiquity, bandwidth and Internet Protocol addressability, which has made long distance no longer a product, much less a company. It's just another application on the IP network and a part of the new improved telco of the future."

Sprint is considered by A.T. Kearney's Andrew Cole as the No. 1 target for any cable company that wants integrate wireless more easily into their offering, then "go toe-to-toe with Bells." But again, Sprint has become much stronger since it announced the merger of equals with Nextel.

TELCO'S WATCH WHERE YOU SPEND YOUR MONEY!

Instead of concentrating on buying each other out, worry about high speed/long distance wireless access (wimax). Acquiring that and any resources to accomodate it, on a nationwide basis is your ticket to the future. This is my vision, everything will be on Internet Protocol. Sony, Toshiba, Philipps, Motorola and others will come out with phones that tap into a wimax wireless connection. Traditional phone lines as we know it will not be around much longer. Once a company has aquired nationwide wimax access, they can use all that bandwidth to bring VOIP, IPTV, and Internet access at an affodable price. Long distance, Cell phones, satellite/cable TV and traditional phone service will be quickly vaporized. I use VOIP on a daily basis, and when it is done correctly it sound better than a traditional phone line. Spend your investors dollars on a technology that will be the future, dont spend it on aquiring old technology that will be useless in a couple of years.

[xc coach]

Telco Consolidation

Telco consolidation is the result of the money the already consolidated "baby bells" made by being able to set prices, rather than compete on price. This new wave of consolidation is a sign of oligopolies finding it cheaper to by their competition than fund innovation or compete on price. The result will be less consumer choice, as with the Oracle/PeopleSoft debacle, at arbitrary prices with more limited feature sets, as with MicroSoft's Longhorn.