Verizon Communications’ deal to acquire long-distance telephone company MCI for more than $6.7 billion is the third high-profile telecom industry merger of the past two months. But the wheeling and dealing in the sector is far from over, analysts say.
The Verizon-MCI agreement, announced early Monday, comes on the heels of a rash of consolidation in the telecom sector, which has suffered years of declining sales, company bankruptcies and accounting shenanigans. At the same time, traditional long-distance telecom service providers are struggling to compete with new entrants in their business such as Internet telephony, which offer consumers the ability to make telephone calls over an Internet connection at greatly reduced rates.
“What we are seeing here with Verizon and MCI is more of the inevitable,” said Tom Taulli, author of “The Complete M&A Handbook” and a professor at the University of California’s Marshall School of Business.
“After the dot-com boom and bust, the telecom sector went through so much restructuring that companies in the sector are ready for consolidation and they have lots of cash available, and their stock prices have gone up,” Taulli said. “So Wall Street is much more amenable to doing deals in this sector, and the thinking is it makes sense to consolidate.”
Indeed, the recent rash of deal activity will reduce the U.S. telecom industry to five dominant players: Verizon, SBC Communications, BellSouth, Sprint and Qwest. In December, Sprint agreed to a $34 billion merger with Nextel Communications, and in January SBC Communications struck an agreement to acquire its former parent, AT&T, for $16 billion.
In January alone, the telecom sector saw $44 billion in global merger activity, up from $6 billion in January 2004, according to Dealogic, a research firm that tracks M&A activity.
Industry observers don’t expect the deal-making to end any time soon. Analysts like Taulli say the recent deals among the big telecom players could spark more consolidation among regional telecom companies. It also could lead to more mergers in related industries like telecom equipment providers, or in the burgeoning Internet telephony business.
“The telecom business is changing rapidly, and if you’re an independent, small or midsize player and you’re out there alone, your market share is only going to deteriorate,” said Taulli. “You have new technologies like the Internet in the market, and so companies that offer services like Internet telephony can make the big, traditional companies’ lives miserable. So many of them will have to combine to maintain a competitive edge.”
Another factor that is likely to mean more industry deal-making is the re-election of President Bush, whose administration has placed few limitations on company mergers Scott Cleland, chief executive of the Precursor Group, an independent research firm, told CNBC Monday.
“Washington has been a blinking green light for consolidations,” Cleland said. “[Law makers] realize that the competitive landscape in the telecom business has changed.”
One of the key sectors likely to see more M&A activity as a result of the changes sweeping through the telecom industry is the telecom equipment sector, which includes companies like Lucent, Nortel and Alcatel says Tom Taulli.
“The strategic balance in an industry can shift significantly when you see changes like this, and it can have an impact on other areas, and the telecom equipment provider area is one place I think will be impacted,” said Taulli. “If your customers are joining up, there’s going to be fewer of them, and these companies are going to engage in a significant amount of cost-cutting, which means they will squeeze their suppliers, so they will have to consolidate.”
Another area of the industry likely to see consolidation is Internet telephony.
“The venture-backed companies will eventually become buyout targets, so we will see more smaller deals come and telecom companies try to add value to their networks,” Taulli said.
Dave Mock, a wireless and telecom consultant and author of “The Qualcomm Equation,” says he expects the recent telecom mergers to trigger consolidation within smaller regional telecom players who want to remain competitive and offer a broad array of services that consumers now demand, including cable television and high-speed voice and data transmission. The trend is already in the works with a recent deal between AirGate and Alamosa Holdings, two regional affiliates of Sprint PCS.
“We’ll see more of this because the motivation is for smaller companies to get bigger. The big players keep growing, and the smaller players are going to link together so they don’t get squashed,” Mock said. “And national coverage is what consumers want, and regional providers are missing out on that. It’s all about paving the highway to homes for more bandwidth.”