Merger mania

Is bigger better? Telephone companies seem to think so.

Shortly after SBC Communications Inc. announced in January its intention to buy AT&T Corp. for $16 billion, Verizon Communications Inc. and Qwest Communications International Inc. began battling over MCI Inc., with Verizon eventually snaring MCI for $8.5 billion.

Driving these megadeals is the prospect of getting more business from large corporate and federal customers. Carriers hear these organizations clamoring for a complete range of voice and data services, and they also see bigger revenues from delivering enterprisewide services.

Customers "now want a set of complex solutions that are based upon IP solutions that include such things as network management, network security, net-conferencing services ? very complex services," said Jim Lewis, senior vice president of policy and planning at MCI, during a May 24 conference call.

In the federal arena, these mergers will better position the companies to bid on the General Services Administration's Networx contract for governmentwide telecommunications and data services, said analysts and industry officials. Networx, valued at up to $20 billion and slated for award in April 2006, favors companies that can provide large-scale, managed network and other telecom services to federal agencies.

"One of the major reasons behind the Verizon and SBC acquisitions was to gain greater access to large customers, including those in the federal government," said Warren Suss, president of Suss Consulting Inc. of Jenkintown, Pa.

THE NEW COMPETITORS

Verizon's planned purchase of MCI joins the largest provider of local telecom services in the United States with the second-largest national carrier. The result will be a giant wireline and wireless provider with a national and global presence with voice, data and Internet services, according to a report by Current Analysis Inc., a telecom and IT research firm.

Verizon also picks up MCI's abundant stable of business and government customers. MCI counts among its federal clients all agencies except the Environmental Protection Agency, which has its own communications network. The company's major federal customers are the Agriculture, Defense, Health and Human Services and Interior departments, Federal Aviation Administration, Social Security Administration and the U.S. Postal Service.

The company is one of two incumbents on GSA's FTS2001 contract, which provides comprehensive telecommunications services to the government. MCI's portion of the contract is worth almost $1.6 billion, according to government IT research firm Input Inc.

Despite its former troubles, MCI remains the largest prime telecom contractor in the federal space, ranked No. 18 on Washington Technology's 2005 Top 100 list of the largest federal prime contractors. That commanding market position helps explain why Verizon and Qwest engaged in an acrimonious, 11-week tug of war over the highly prized company.

MCI and Verizon must get regulatory and MCI shareholder approval of the merger, which they hope will close later this year.

Suss said Verizon brings to the table the leading federal local-exchange carrier sales organization, including important contracts such as the Washington Interagency Telecommunications System 2001 contract. Under this eight-year, $1.4 billion contract, awarded by GSA in 2000, Verizon provides local voice and data services to most civilian agencies in the north Capital region.

Once merged, Verizon and MCI would rank No. 16 on the current Top 100 list, with $897.3 million in 2004 prime contracting IT revenue.

The acquisition of MCI will let Verizon enhance its secure-service offerings for government customers, Lewis said. MCI is one of the largest suppliers of managed services and secure voice, data and Internet services to federal, state and local governments, he added.

The planned SBC-AT&T transaction will combine AT&T's global systems capabilities, corporate and government customers and IP business with SBC's local exchange, broadband and wireless solutions, Current Analysis said. The two companies' separate networks will be blended into a unified IP network. The companies expect to close the deal in 2006.

SBC also will get AT&T's collection of large government contracts. AT&T serves most civilian, defense and intelligence agencies. Its major contracts are the Defense Information Systems Agency's $40 million Government Emergency Telecommunications Service contract -- AT&T is one of four companies that won the contract -- and the Agriculture Department's $400 million, multiple-award Universal Telecommunications Network contract. The company also is a subcontractor on DISA's Global Information Grid Bandwidth Expansion contract.

SBC's government business is primarily in the Southwest on military bases, where it provides telecom services, Suss said. Like Verizon, SBC has focused most of its attention on the residential and commercial markets.

Meanwhile, SBC has been scaling back staff at its federal government unit in anticipation of its merger with AT&T, industry watchers said. SBC declined to comment.

SBC "looked at the federal group, and saw that this was an opportunity in the near term to cut costs and pretty up the bottom line for the investor community," Suss said. "That's not an encouraging sign in terms of its long-term commitment to the federal space, but we'll have to see what happens."

At the same time, Robert Collet, former vice president of engineering and chief technology officer at AT&T Government Solutions, in May went to Science Applications International Corp. as vice president and chief engineer for the company's transformation, training and logistics group. Collet was overseeing AT&T's plans to win the Networx contract.

AT&T has since named Henry Beebe, a former DISA official, to lead the company's Networx effort.

Sprint Corp. announced last December that it would merge with Nextel Communications Inc. in a $36 billion deal. The combined assets of the deal will create a top wireless carrier with a global IP network, offering residential, business and government customers new broadband wireless and integrated communications services. The new company, to be called Sprint Nextel, plans to spin off its local telecom operations following the merger.

Sprint has a relatively strong sales organization, with the FTS2001 contract and will make a good partner for wireless provider Nextel for the Networx procurement, Suss said. Like its competitors, Sprint realizes that the move toward converged telecom and IT services means companies must possess a wide spectrum of capabilities.

An agency that wants integrated services "naturally wants to be able to buy the basic network infrastructure from someone who can provide that full range of services," said Tony D'Agata, general manager of Sprint's government systems division.

ASSESSING THE DEALS

Federal officials are looking closely at the telecom mergers to ensure they will get what they need: managed network services and the ability to choose different carriers, especially as IT and telecom services converge. They said they don't think the planned deals will necessarily drive up prices or limit their choices.

"I don't see the mergers as changing the way we do business," said Tony Montemarano, program director of DISA's Global Information Grid - Bandwidth Expansion contract. "Industry is flexible. They're going to give us what we need, when we need it, based upon the competition in the market."

With industry consolidation, customers will not end up in a situation where they have to go to one vendor, government executives said. Government customers not only look at prices from different telecom vendors, but also consider service quality and volume, technology delivery and capabilities, said John Johnson, GSA's assistant commissioner of Federal Technology Service delivery. He was part of a government panel that discussed the telecom industry consolidation at a mid-May meeting of the Industry Advisory Council.

Industry executives said they are not worried that the telecom deals will slow inroads by systems integrators into the telecom arena. Integrators and telecom companies will maintain the partnerships and teaming opportunities that they have enjoyed all along, said Ray Thorpe, vice president of civil and federal programs at Harris Corp. The Melbourne, Fla., developer of communications products for government and commercial customers provides an integrated communications system for FAA, under a $1.7 billion to $3.5 billion contract awarded in July 2002.

If their deals are approved, SBC and Verizon face a daunting task: merging operations, workforces and networks with their newly acquired companies. Analysts do not expect the effort to disrupt either company.

"Since the acquiring regional Bell operating companies focused on regional and local business, while the acquired companies focused on long distance, there will only be minimal overlap in functions," Suss said. "These two factors should minimize the risk of loss of focus -- and loss of business -- during the mergers."

Staff Writer Roseanne Gerin can be reached at rgerin@postnewsweektech.com.
Will the beleaguered Quest Communications International Inc. survive after losing MCI Inc. to Verizon Communications Inc.?

The Denver-based regional carrier is buried under a mountainous $17 billion debt. It also has failed to raise significant revenue from its local operations and small long-distance unit, some analysts said. The company suffered a further blow from its recent financial scandal under former Chief Executive Officer Joseph Nacchio. And it shook up the leadership of its government unit, bringing in Diana Gowen, former president of government solutions at Broadwing Communications LLP of Austin, Texas, to replace James Payne as general manager of Qwest Government Solutions Inc.

Without MCI, Qwest either will have to sell off pieces of its business or become part of a larger company in order to grow, said Eric Paulak, network services analyst at Gartner Inc. It might, for instance, sell its calling services in states like South Dakota, Wyoming and Montana, which don't generate much revenue, or its long-distance business, he said.

Qwest could become an acquisition target itself, said Brian Washburn, principal analyst of business network services at Current Analysis Inc. Qwest, the smallest of the regional Bell operating companies, employs 41,000 workers, and in 2004 had revenue of $13.8 billion, but a net loss of $1.8 billion. In early May, Qwest reported first quarter revenue of $3.5 billion and profit of $57 million.

Qwest, which provides calling service in 14 Western and Midwestern states, has been a second-tier telecom player in the federal market. Its government business brings in about $350 million to $400 million annually, said Tony Bardo, senior director of civilian networks and marketing at Qwest's government services division.

The carrier now must win a spot on the Networx telecom services deal if it is to become a top contender in the government market, said Warren Suss, president of Suss Consulting of Jenkintown, Pa.

The General Services Administration's Networx procurement is a governmentwide telecommunications and network services contract worth up to $20 billion. It will be awarded in April 2006.

Although Qwest has not declared publicly that it will bid on Networx, analysts said Gowen, who joined the company early this month, should make the contract a top priority.

"In general, their fate will depend on their ability to win a slot on Networx, although they can still hang in there with other contract vehicles, working as a subcontractor," Suss said.

Additionally, he said, "there is, over the long run, a plan to introduce more telecom and network services on the Federal Supply Schedule as a vehicle, so [Qwest] may be able to pick up some scraps."

After the company's bid for MCI was rejected, Qwest Chief Executive Officer Richard Notebaert said the company would look to acquire smaller companies or assets to add clients to its nationwide fiber-optic network and shore up revenue.

Qwest may also consider buying any assets divested from the prospective SBC Communications Inc.-AT&T Corp. or Verizon-MCI deals, Bardo said.

"The future role of Qwest will depend on its overall viability and overall success, and that's still up in the air," Suss said. BUYER

SBC Communications Inc.

Location: San Antonio

Chairman and CEO: Edward Whitacre Jr.

Head of government unit: Doug Dangremond

2004 revenue: $40.8 billion

2004 net profit: $5.9 billion

Employees: 163,000

Government customers: Civilian and defense agencies

2005 Washington Technology Top 100 rank: Not ranked

www.sbc.com

Strengths: An extensive local exchange, broadband, and wireless solutions in the form of its 60 percent ownership of Cingular Wireless LLC.


SELLER

AT&T CORP.

Location: Bedminster, N.J.

Chairman and CEO: David Dorman

Head of government unit:Lou Addeo

2004 revenue: $30.5 billion

2004 net loss: $6.5 billion

Employees: 47,600

Government customers: Civilian, defense and intelligence agencies

2005 Washington Technology Top 100 Rank: No. 31

www.att.com

What SBC gets: A vast list of global enterprise customers, a global IP network, and the No. 1 telecom brand name in the world.

BUYER

Verizon Communications Inc.

Location: New York

Chairman and CEO: Ivan Seidenberg

Head of government unit: Shelley Murphy

2004 revenue: $71.3 billion

2004 net profit: $7.8 billion

Employees: 210,000

Government customers: Civilian and defense agencies

2005 Washington Technology Top 100 rank: No. 57

www.verizon.com

Strengths: An extensive local network footprint in 29 states and the District of Columbia.


SELLER

MCI Inc.

Location: Auburn, Va.

CEO: Michael Capellas

Head of government unit: Jerry Edgerton

2004 revenue: $20.7 billion

2004 net loss: $4 billion

Employees: 40,000

Government customers: All federal government agencies except the Environmental Protection Agency; core customers: Agriculture, Defense, Housing and Human Services and Interior departments, Federal Aviation Administration, Social Security Administration and U.S. Postal Service

2005 Washington Technology Top 100 rank: No. 18

www.mci.com

What Verizon gets: A nationwide, fiber-optic network and a big list of corporate and government clients.



BUYER

Sprint Corp.

Location: Overland Park, Kan.

Chairman and CEO: Gary Forsee

Head of government unit: Tony D'Agata

2004 revenue: $27.4 billion

2004 net loss: $1 billion

Employees: 59,900

Government customers: Defense, Education, Homeland Security and Justice departments, Equal Employment Opportunity Commission, Federal Aviation Administration, FBI, Defense Information Systems Agency, National Guard, U.S. courts

2005 Washington Technology Top 100 rank: No. 26

www.sprint.com

Strengths: Long-distance and PCS wireless services; provides a wide range of data, Internet, local, international, network access and facilities management solutions.


THE SELLER

Nextel Communications Inc.

Location: Reston, Va.

President and CEO: Timothy Donahue

Head of government unit: Leon Frazier

2004 revenue: $13.4 billion

2004 net profit: $3 billion

Employees:19,000

Government customers: All federal agencies through a GSA contract

2005 Washington Technology Top 100 rank: Not listed

www.nextel.com

What Sprint gets: A large base of business users for its mobile services throughout the United States.


Sources: Current Analysis Inc., Hoover's Online, Input Inc. and companies




AT&T

1875 - Alexander Graham Bell invents telephone.

1877 - Bell founds Bell Telephone Co.

1885 - AT&T created.

1984 - AT&T consent decree goes into affect, breaking AT&T into a long-distance telephone company and 22 local phone companies owned by seven local holding companies.

1994 - AT&T buys McCaw Cellular for $12.6 billion. The company later becomes AT&T Wireless.

1996 - AT&T spins off its products and systems manufacturing arm, later named Lucent Technologies, and its computer company, NCR, which it had bought several years earlier.

2005 - SBC announces it will acquire AT&T for $16 billion.

MCI

1968 ­ MCI founded as Microwave Communications Inc.

1969 ­ Courts allow MCI to compete with AT&T for long-distance business.

1985 ­ Bernard Ebbers becomes CEO of LDDS, which purchases numerous telecommunications companies during the next decade.

1995 ­ LDDS acquires voice and data transmission company Williams Telecommunications Group for $2.5 billion cash and changes its name to WorldCom.

1998 ­ WorldCom completes mergers with MCI Communications ($40 billion), Brooks Fiber Properties ($1.2 billion), and CompuServe ($1.3 billion) and forms MCI-WorldCom.

2002 ­ Investigations begin into WorldCom's finances. Ebbers resigns, and WorldCom files for bankruptcy.

2004 ­ WorldCom emerges from bankruptcy and renames itself MCI.

2005 ­ Verizon announces it will acquire MCI for $6.7 billion, later revising it upward for an $8.5 billion final offer.

SPRINT

1889 ­ Brown Telephone Co. founded.

1940 ­ Brown becomes United Utilities.

1972 ­ United Utilities becomes United Telecom.

1992 ­ United Telecom becomes Sprint.

1993 ­ Sprint merges with Centel, a local and wireless phone company.

2004 ­ Sprint announces intent to acquire Nextel in a $36 billion deal.


VERIZON

1984 ­ Bell Atlantic formed from breakup of AT&T.

1996 ­ Bell Atlantic buys Baby Bell Nynex, holding company for New York Telephone and New England Telephone, for $22.1 billion.

2000 ­ Bell Atlantic acquires GTE and forms Verizon Communications. GTE's roots go back to 1918, when it was formed after investors acquired the Richland Telephone Co. in Wisconsin and began buying other telephone companies.

QWEST

1984 ­ U.S. West formed from breakup of AT&T.

1988 ­ Qwest founded as Southern Pacific Telecommunications Co. by Southern Pacific Railroad.

1998 ­ Qwest acquires LCI Communications.

2000 ­ Qwest Communications Inc. acquires U.S. West, a Baby Bell.

2005 ­ Qwest fails in attempt to acquire MCI.

SBC COMMUNICATIONS

1984 ­ SBC formed from breakup of AT&T.

1997 ­ SBC acquires Pacific Telesis, another Baby Bell.

1998 ­ SBC acquires Southern New England Telephone Co., another Baby Bell.

1999 ­ SBC acquires Ameritech.

2005 ­ SBC announces it will acquire AT&T for $16 billion.


Sources: Newton's Telecom Dictionary, SEC filings, company Web sites