BT/Infonet merger: What it means to Infonet customers

* Acquisition by BT will give Infonet better stability, wider European coverage

Infonet stands out among a handful of top-tier global service providers as having broad geographic reach, a full suite of managed network services and superior customer service. What will happen to Infonet remains to be seen now that the El Segundo, Calif., company is being acquired by BT.

Infonet stands out among a handful of top-tier global service providers as having broad geographic reach, a full suite of managed network services - including IP services - and superior customer service. What will happen to Infonet remains to be seen now that the El Segundo, Calif., company is being acquired by BT.

BT Group of London announced on Nov. 8 plans to acquire Infonet for $965 million. However, since Infonet has $390 million in cash, BT will pay only $575 million for Infonet, which is less than Infonet's annual revenue of $620 million.

Due to heavy competition and aggressive pricing in IP services, Infonet has been losing money in recent years even as it grows its revenue by double-digit amounts. Infonet has indicated that it would be cashflow-positive by the end of the current financial year.

If the deal goes through, Infonet will have the backing of a huge and profitable carrier in BT. BT officials are hoping the acquisition of Infonet will be approved by June of 2005.

The combination of these two heavyweights will affect the purchasing decisions of network managers at multinational corporations based in the U.S., Europe and Asia. In our previous newsletter, we looked at the BT/Infonet deal from BT's perspective. Today we'll explore the deal from Infonet's point of view. 

Infonet has 1,800 corporate customers including IBM and Hilton International.  Known for its global reach, Infonet has local operations in 70 countries and network access in an additional 180 countries. It has POPs in 3,000 cities.

According to Infonet and analysts, the acquisition of Infonet by BT brings three major benefits:

* Stable ownership. Infonet has changed hands several times in its 30-year-history, and it has essentially been up for sale since 2001. Hopefully, BT with its strong financial position will be a solid parent company.

* Higher profitability. Infonet will be able to take advantage of buying local access in some European cities at much lower prices from its parent BT. That should make Infonet's European operations more profitable. In particular, Infonet will benefit from BT's network assets in Germany, France, U.K. and the Netherlands. Where Infonet now buys local access from other providers, it will be able to make at-cost purchases from BT.

* Better capacity in Europe. By taking advantage of BT's sizeable fiber capacity in Europe, Infonet should be able to compete better against its closest competitor Equant, which is majority owned by France Telecom.

BT says Infonet will operate as a separate subsidiary for some time, even as the two carriers' underlying transport networks are rapidly combined for savings.

"The financial synergies we're looking for can be reached just by doing backbone [consolidation], which doesn't affect our products, services or customer-facing activities," says Jose A. Collazo, Infonet CEO. "The acquisition does not need any additional restructuring in order to be successful."

Many questions remain about how the two service providers will be combined and how well BT will execute the merger. However, industry analysts were generally positive about the idea of combining BT and Infonet.

"Infonet's ownership was always this motley crew of PTTs and over the years it periodically would change," says David Rohde, a telecommunications industry expert with TechCaliber Consulting. "Over the years, it seemed like one or more of the national carriers seemed to be out there selling their Infonet shares. One question that enterprise customers always had is who owns Infonet. Now they'll have a stable answer if the deal goes through. BT is in relatively good financial shape."

Industry analysts anticipate little or no turmoil for Infonet's existing corporate customers if the merger is executed well.

"As far as Infonet's customers are concerned, I'm not sure there will be much change," says Bryan Van Dussen, director of telecommunications research at the Yankee Group. "The fact that BT will have capital and resources might mean that they'll see greater support and a wider variety of products and services rolled out. It may be that they'll see some additional consulting and professional services offered. I think the customers probably will see some material benefits in the longer run."

For Infonet's enterprise customers, where rubber hits the road will likely be in what happens to their account management teams.

Infonet's Collazo says that "for our customers, we think that there should be no negative impact" from the BT acquisition. In fact, he sees some benefits from faster provisioning in certain European locations.

"We'll be able to spend more money on developing better tools and additional products that was today spent on buying capacity," Collazo says.

Industry observers urged BT to be sure to retain Infonet's top employees when consolidating the two companies.

"I would hope BT looks at the Infonet people and retains the good people if they have relationships with the local carriers," Rohde says. "One of Infonet's advantages is that their people have been around for years or decades and they speak the local language and they know how to get somebody on the phone to fix a problem."

BT officials expect little or no problems in getting the Infonet acquisition approved by Infonet's shareholders and U.S. and European government officials. Infonet's six primary shareholders - telecom operators from the Netherlands, Switzerland, Spain, Australia, Sweden and Japan - have already approved the acquisition and they hold 97% of the company's stock.

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