Mergers Only Mask the Truth

Peter : On Rad's Radar?
Peter
| Peter Radizeski of RAD-INFO, Inc. talking telecom, Cloud, VoIP, CLEC, and The Channel.

Mergers Only Mask the Truth

I have a firm belief that most mergers are just ways to make the books look better by clouding the numbers. Take this headline from the Morning Journal, "CenturyLink has profitable second quarter, primarily due to acquisition". I agree with that.

The telling number is the revenue or income or EBITA, but this metric: "CenturyLink added more than 29,000 high-speed Internet customers in the second quarter, compared to 28,000 in the second quarter of 2009, the company reported." HUH? You added the same number of broadband even though your revenue was up 3x what it was before you merged with EMBARQ?

Windstream added 14,800 new high-speed Internet customers during the second quarter - about 58% resi penetration. ... Total access lines declined by approximately 34,000. [Windstream]

"Qwest saw a decline in its earnings as revenue continued to fall on further landline losses," according to the WSJ. "As with the other telcos, the DSL business continues to be weak. ... Qwest only added 7,000."

Debt is going up (and getting more expensive) while access lines are declining. Long term this doesn't look good. Qwest has been working on an FTTX plan, but it will be a while to pull off (and require more CAPEX than they are now spending).

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Most mergers are about scale. The bigger they are the cheaper they can deliver service. How often has that reality been true? Bigger means that there will be massive layoffs to the point that the new company can't find anything or accomplish anything, because all the people with deep domain knowledge (the Linchpins) are gone. Then there is the back office, which usually can't be integrated for months or even years. The political silos and departmental turf mean that no one can work together and there are competing pieces of the company working against each other. It's a nightmare that only the bankers win. Shareholders may make a little bank upfront, but long term value is not on the increase. Teclos play in flat markets: phone, broadband, TV - these aren't growing pools; they are shifting pools. Shifting as customers bounce from cable to telco and back. Shifting as people move around the nation looking for a better job or just A job or a better life. So long term growth opportunities are looking good because they don't innovate and the hardware vendors aren't making enough profits to innovate either.

Sounds bleak but it leaves plenty of room for forward thinking, flexible companies that have a value porposition for a selective target market - and can move on it now!



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