Covad, MegaPath Combination Signals Larger M&A Trend

Dan Foster, MegaPath chief sales and marketing officer, last month at COMPTEL told me that MegaPath would be "active" in M&A in the next six months. Now I know what he was talking about.

MegaPath Inc. and Covad Communications Co. last week announced their intentions to merge. The deal, for which they declined to disclose a price tag, will create one of the largest managed service local exchange carriers in the nation, according to the partners, which offer Ethernet, DSL, T1, security, VPN, security and voice and Internet services.

Covad is a $400 million company focused primarily on wholesale and offers integrated access, VoIP, wireless (facilities-based WiMAX), T1 and Ethernet (it plans a nationwide Ethernet launch this month). Its MPLS IP backbone connects all its assets nationwide. Pat Bennett, CEO of Covad , will continue as CEO of the new entity.

MegaPath, which Covad CTO Aamir Hussain told me is one of his company's key customers, is probably best known for its MPLS services. D. Craig Young, MegaPath CEO , will be executive chairman of the combined company.

This new combination follows several years in which competitive carriers have joined forces to make a stronger play against incumbent carriers and also large competitors. It also is yet another signal that M&A activity is starting to pick up again despite the prolonged economic slowdown.

As Nightly Business Report recently noted, 2010 has already seen $500 billion in deals around the world. That's more than 20 percent ahead of last year's pace and should stay on track as the U.S. economy chugs ahead.

Simon Perry from Ernst & Young told CNBC in January that he expected as much, commenting: "I think 2010 is going to be a much better year than 2009." He added that although he expected the values of individual deals to top out at around $5 billion: "Buyers who are in a position to be strategic will be strategic."

Although the economy tanked, the NBR report noted that many companies are cash-strong, and now have the opportunity to spend some of that cash to strengthen their positions. And NBR guest Paul Parker, head of global M&A with Barclays Capital, said that too much cash can make a company a target for others that want to deleverage.

Alas, for a variety of reasons, we're seeing a fair amount of deal-making in communications circles.

On March 19 Ciena closed its purchase of Nortel's MEN assets - that is, the Ethernet and optical solutions of the former networking giant.

Tom Mock, senior vice president of strategic planning at Ciena, mentioned that the Nortel MEN purchase accelerates Ciena's strategy by two to three years. Not only does it expand Ciena's product portfolio, it also gives Ciena a larger customer base, of larger carriers, and a broader geographic reach, particularly in Asia and Latin America.

"When we're finished with this, from an optical networking perspective we'll be No. 1 in North America, and a pretty strong No. 3 worldwide," Mock told me just prior to the close, adding that post-merger Ciena will have a little more than 800 customers worldwide.

"When we're done here we'll serve about 75 percent of the world's largest service providers," he added.

Earlier in March, PAETEC revealed its purchase of U.S. Energy Partners LLC in a $3 million deal. The privately-held company sells electricity to more than 3,500 customers in western New York State. (The deal followed PAETEC's acquisition last year of energy company VARO Technologies and a lot of talk by PAETEC leader Arunas Chesonis about how selling energy services could enable it to greatly expand its ARPU.)

Around the same time ABRY Partners signed a definitive agreement for an investment fund it manages to acquire RCN in a deal valued around $1.2 billion.

While M&A can mean less competition (which can be good or bad, depending on where you sit) and, potentially the elimination of jobs, a wave of mergers and acquisitions can also signal some level of optimism about the path ahead.