Mergers reshape telecom industry

Recent telecommunications merger announcements will reduce the number of carriers in the government marketplace, but will let the surviving companies offer more comprehensive services to the federal customers, telecom analysts said.

After this wave of acquisitions is completed over the next few years, the telecom market will become "an industry of giants, offering everything to everyone: voice, television, wireline and wireless," said Jeff Kagan, an independent telecom analyst. The industry transformation will end with about four or five companies left to compete, he said.

Verizon Communications Inc. of New York said today it would purchase MCI Communications Corp. of Ashburn, Va., for $6.7 billion in cash, equity and a special dividend payment, killing a rival bid from Qwest Communications International Inc. of Denver.

The announcement follows on the heels of the Jan. 31 announcement by SBC Communications Inc. of San Antonio to buy AT&T Corp. of Bedminster, N.J., for $16 billion and the agreement by Sprint Corp. of Overland Park, Kan., last December to buy Nextel Communications Inc. of Reston, Va., for $35 billion.

The two latest deals "will propel SBC and Verizon into the mainstream of federal network deals, as opposed to building their own strategies as they were doing before," when they had to construct their own long-distance calling solutions, said Warren Suss of Suss Consulting, Inc., which specializes in federal telecom market strategy and research. Long-distance calling services were separated from local services in the mid-1980s.

After the mergers, SBC and Verizon will control long-distance and last-mile assets and will be able to offer government clients more "tightly woven, end-to-end, keyboard-to-keyboard solutions," Suss said.

They also will be able to integrate operational support systems and other network assets that will "simplify things for federal customers," he said.

The Verizon-MCI deal "strengthens the long-term visibility of MCI's global network, which is a critical component of government communications systems," including those used by the Defense and Homeland Security departments, Verizon said in a statement.

The mergers will not affect the General Service Administration's strategy for FTS Networx contract, to be awarded next year, telecom analysts said. Networx is the 10-year, $10 billion to $20 billion governmentwide telecom and information technology contract that will replace the government's current telecom services contract when it expires in 2006.

GSA has anticipated acquisition activities in its procurement strategy for Networx, Suss said.

MCI and Sprint are the two carriers that hold GSA's current FTS2001 telecom services contract.

The SBC-AT&T transaction and the Verizon-MCI deal are still subject to regulatory approval, which won't likely be granted until a year or more from now, telecom analysts said. Until then, the companies will "be careful not to jump the gun and rattle the regulatory approval process," Suss said.

After the deals are approved, the companies will have to spend a substantial amount of time on combining their legacy systems and organizations' structures, Suss said. SBC already has said it will cut about 7,000 jobs through attrition this year, while AT&T said it expected to decrease it workforce as well, but did not state headcount decreases.