CenturyTel Qwest Merger: Experts Weigh In

When it comes to mergers in the telco business, one thing I trust are the insights of Peter Radizeski who’s TMCnet blog – On Rad’s Radar is a must-read if you want perspective into the communications market with the sugar coating Weight Watchers would approve of. Pete tells it like it is and has the experience to back it up. I immediately reached out to him for comments on the Qwest merger with CenturyTel and he told me he believes these sorts of deals are more about the bankers (he is often used as a consultant by Wall Street) and that the fundamental problem of landline revenue evaporating doesn’t go away with this deal.

Peter goes into more detail in his blog and he mentions that synergies often touted in such deals is a code word for firing people and cutting benefits and pensions. Gary Kim, another highly respected voice in the market said in a TMCnet column that he sees the merger as helping due to the sheer size of the resulting company.

Paula Bernier is yet another very respected telecom personality and in a TMCnet column she brings us up to speed on a sea of telco mergers these past years. She begins her column with, “In my day there were seven RBOCs. That’s right, seven,” and then goes on to describe what happened to many of these companies through a dizzying tour down Memory Lane.

In addition, TMCnet’s video personality Kelly McGuire has written two stories about the merger so far. The first one explains some of the details of the deal such as the size – $10.6 billion and the fact that the new company will now serve 37 states. Her second article explains why the Communications Workers of America are upset about the deal.

The Wall Street Journal’s Dennis Berman has more details and explains that the new company hopes to be a bigger player in the business market and hopes to offer triple-play like services to more effectively compete with cable companies.

My take is simple. I agree with Gary Kim that size matters. I also see that having a larger footprint means the ROI on equipment upgrades and marketing spend could conceivably be lower. Obviously there will be layoffs as a result of the transaction and I feel terrible for the workers who will be negatively affected. But in a business with declining revenues, you either cut costs or go out of business – meaning bankruptcy courts and even more layoffs.

An obvious problem is the resulting company is saddled with over $22 billion in debt and this is generally not a good time to owe such a large sum.

It remains to be seen how well the integration goes – certainly AT&T employed a similar strategy when it (formerly SBC) put so much of itself back together again and this worked out well for the company. But then again, wireless is a big factor in AT&T’s earnings and it is unclear what revenue CenturyTel will be discovering to replace declining PSTN proceeds. As always – time will tell and we can expect many more telecom mergers into the future.

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