Level 3's Global Crossing buyout could save carriers, though challenges remain

Deal should slash carriers' costs and expand reach, but analysts cite wireless and other issues

Level 3's proposed $1.9 billion Global Crossing buyout will boost the carriers' global presence and enterprise services portfolio, though analysts say success is far from a sure thing.

In announcing its plans to form a combined company with more than $6 billion in revenue, Level 3 said that it would be "expanding geographic reach" and offering "an extensive portfolio of transport, IP and data solutions, content delivery, data center, collocation and voice services." The company's IP networks will deliver services to 70 countries and will be able to achieve cost savings of about $300 million per year, company officials said.

Gartner analyst Daniel O'Connell says Level 3 will benefit substantially from Global Crossing's presence around the world.

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"Global Crossing has a particularly good presence in Latin America," says O'Connell, who notes that the carrier has a total of 14 data centers in Latin America, including in major cities such as Rio de Janeiro, Sao Paulo, Santiago and Buenos Aires. "They have a pretty deep set of services based in the United Kingdom and there are other kinds of European and Asia-Pacific markets that Level 3 gets out of this. ... Both companies have been trying to move up the value chain, so this is one of those consolidations we have expected."

Sandra Palumbo, a Yankee Group analyst, said the long-anticipated deal gives Level 3 and Global Crossing more of a fighting chance against other big carriers as consolidation continues. Both companies have struggled since the Internet bubble burst and they combined for about $800 million in losses last year, but their proposed union gave Wall Street something to cheer about Monday as stocks of both companies soared.

"The scale of this new company creates a more formidable network services competitor to the likes of AT&T, Verizon Business, BT, etc.," she wrote in a blog post. "With the breadth and depth of its coverage and data and converged services offerings at both the wholesale and large enterprise segments, this new company provides a formidable option for many companies with global needs."

Industry watchers expect Level 3 might even make other acquisitions if the expected cost savings from the Global Crossing deal come through.

Nemertes Research chief research officer Johna Till Johnson says she thinks Level 3 and Global Crossing will mesh well since both companies have long histories in the wholesale bandwidth market. She also thinks Level 3 customers will benefit from gaining access to Global Crossing's larger portfolio of managed services.

"Level 3 does a nice job with raw fiber and fiber optics, while Global Crossing has a cutting edge series of communications services such as hosted VoIP," she says. "It's nice that they both have come together, because there was a real gap in Level 3's portfolio for services such as hosted VoIP and managed SIP."

Even so, Johnson says that there's no guarantee the deal will be a smash hit. After all, she notes, the acquisition will still leave Level 3 without a real strategy for wireless data that is becoming essential for any ISP. On top of this, she says that mergers on this scale rarely go off as planned and that Level 3 faces key decisions regarding its personnel moving forward.

"If they can execute on it, it should be good for business customers, but executing on mergers and acquisitions is horribly difficult," especially when it comes to figuring out which employees should stay or go, she says.

Global Crossing has been moving more into the content delivery market in recent years, as it signed a deal in 2009 with CDN vendors Limelight and EdgeCast that gave Global Crossing customers access to their services. And last year, the company purchased Genesis Networks, a video fiber network operator that specialized in providing end-to-end IP video transmission services for major networks.

IDG News Service contributed to this report.

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