Covad, MegaPath announce merger

* Combined businesses will use a nationwide Ethernet, DSL and T1 footprint to provide Internet, voice, security and VPN services

Covad and MegaPath announced an agreement late last week that they plan to combine operations. If approved by regulatory agencies, the merger would create one of the largest competitive local exchange carriers in the United States. The combined businesses will use a nationwide Ethernet, DSL and T1 footprint to provide Internet, voice, security and VPN services.

Covad and MegaPath announced an agreement late last week that they plan to combine operations. If approved by regulatory agencies, the merger would create one of the largest competitive local exchange carriers in the United States. The combined businesses will use a nationwide Ethernet, DSL and T1 footprint to provide Internet, voice, security and VPN services.

Covad offers IP broadband services in more than 4,400 central offices nationwide and uses wholesale partners such as AT&T, Verizon Business and Sprint while MegaPath has about 30 points of presence (POP) across the country serving about 19,000 small and medium businesses.

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Commenting on the planned merger in a prepared statement, D. Craig Young, MegaPath CEO and the new executive chairman of the combined businesses said, "By leveraging the strengths of each company, we will provide customers and partners with expanded expertise, broader innovative services and a powerful network."

Pat Bennett, CEO of Covad, who will continue as CEO said, "The combination of these two companies creates a powerful new business model that provides users and partners with the industry-leading connectivity and services they require to support their critical business communications needs."

Both companies are privately held, and the combined businesses will be owned by Platinum and MegaPath investors. Terms of the deal were not disclosed, and the transaction (subject to customary regulatory approvals) is expected to close by the end of Q3 2010.

Our observations: We think this planned merger is a good idea because it brings together the strength of Covad’s facilities-based network with MegaPath's complementary value-added communication services. Covad was a pioneer in offering VoIP to the SMB market and integrated access, and it has continued to enhance its network options with improvements like bonded T-1s. Meanwhile, MegaPath offers a robust and competitive portfolio of managed services like hosted VoIP, managed security, MPLS VPNs and SSL VPNs. However, we also note that both the competitive carriers (such as Covad and MegaPath) and incumbent carriers (such as AT&T, Verizon and Qwest) better be ready to face cable operators as a force to be reckoned with integrated access, VoIP and managed services targeting SMBs.

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