Why Windstream Bought PAETEC

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Why Windstream Bought PAETEC

Broadband and communications provider Windstream Corp just agreed to purchase communications conglomerate PAETEC for $2.3 billion in order to add scale and drive growth. PAETEC is an interesting company as it not only provides broadband and IP communications services; it also has data center services, is a large telecom reseller/interconnect, provider of telecom expense management (TEM) solutions and more.

Earlier this year I reported that PAETEC CEO Arunis Chesonis was looking for potential acquisition targets in India and elsewhere and in fact the company did just pick up XETA Technologies to boost its cloud-based service offerings. Interestingly his own company may have been in play while PAETEC itself was exploring more acquisition targets. Keep reading to learn more about other potential acquirers.

Large companies getting larger

Carriers are getting larger – and not just the largest, AT&T and T-Mobile (if it closes), Verizon purchased Terremark and CenturyLink recently picked up Savvis. In order to compete in commoditized business like broadband and voice, scale matters. Peter Radizeski has important comments about this very issue worth reading on his TMCnet blog. Here is an excerpt:

All that unused fiber. The owners of the VAR's - of Quagga, XETA and USEP - who now have to feel slighted. Are probably asking themselves the same thing that I am: WTH???

But if you look at the acquisitions being all over the map - and that Arunas was in India recently where he was rumored to be trying to sell to Tata - then you have to figure the runway ran out on Wall Street for PAETEC. Meaning that organic growth just was not happening.

With everything that is going on in the economy an out industry, sustaining growth is almost impossible. Revenues can not go up when prices are dropping. (This is why the cellcos are going metered -- it's the only way to bring in much needed revenue in a flat market.)

Strong stock prices low interest rate environment

Tech and telecom companies are trading at fair to optimistic valuations and relative to other spaces, these areas are generally good places for investors to be. Moreover, borrowing costs are low, making it a good time for sellers and buyers to be exploring options.

Cloud, cloud and more cloud

A big part of the growth strategies of virtually all telecom companies is data centers and the cloud and PAETEC has been investing in this space making this an important reason for the company to be acquired.

Fiber is in strong demand

With the massive need for bandwidth for things like wireless backhaul, the combined company with 100,000 fiber route miles is in a great position to cash in on the future need for broadband speed.

This deal positions Windstream as a major force in the communications space and it will be worth watching what it decides to do with the various businesses PAETEC is in. Will it choose to invest and growth them – selling TEM services to its current customers or will it make sense to focus just on cloud-based services for the future and divest some businesses which may be considered non-core.



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