BT/Infonet merger: What it means to BT customers

BT to expand its global reach with Infonet purchase

The handful of top-tier global service providers will shrink by one if BT's plans to acquire rival Infonet are approved by U.S. and European Union officials as expected.

BT Group of London announced on Nov. 8 that it would acquire Infonet of El Segundo, Calif., 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 though it has grown its revenue by double-digit amounts. Infonet has indicated that it would be cashflow-positive by the end of the current financial year.

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The handful of top-tier global service providers will shrink by one if BT's plans to acquire rival Infonet are approved by U.S. and European Union officials as expected.

BT Group of London announced on Nov. 8 that it would acquire Infonet of El Segundo, Calif., 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 though it has grown 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 will be approved by June 2005.

The combination of these two industry heavyweights will affect the purchasing decisions of network managers at multinational corporations based in the U.S., Europe and Asia. In today's newsletter, we'll look at the BT/Infonet deal from the perspective of BT and its customers, and next week from the perspective of Infonet and its customers.

At first glance, the Infonet acquisition seems like a smart move for BT. Of course the devil is in the details whenever two large corporations merge, but analysts were generally positive about the BT/Infonet combination.

"I'm always skeptical about mergers and there are always difficulties, but as mergers go this one makes sense," says David Rohde, a telecommunications industry expert with TechCaliber Consulting. 

"It's consolidation. It's an attempt to build market share for the stronger company by taking it away from the weaker company," says Brian Van Dussen, director of telecommunications research at the Yankee Group. "It's a good thing. It's healthy for the industry."

For BT, buying Infonet is its latest attempt to build a strong global IP services capability. BT had a failed joint venture with AT&T called Concert that split up in 2001.

"In BT's case [Infonet] makes strategic sense because when Concert split up, BT took the European assets and AT&T took the Asian assets," Rohde explains. "So AT&T has had a challenge in rebuilding its European infrastructure to compete with BT, which they've done. And now BT can build up its Asian infrastructure by buying Infonet. Infonet has lots of facilities and POPS in Asia, so this helps BT."

BT says it is buying Infonet for three main reasons:

* To get access to Infonet's 1,800 corporate customers for the company's managed voice and data services, the majority of whom are not BT customers. BT officials say they have only 25% customer overlap. Among Infonet's customers are IBM and Hilton International.

* To expand its portfolio of services. Infonet's flagship managed network services - including secure VPNs over a private IP backbone or the Internet  - aren't offered by BT, which has focused on outsourcing and systems integration deals in recent years. Infonet also offers stronger capabilities in mobility, remote access and security.