Speakeasy to combine business with Covad, MegaPath

* Speakeasy offers a portfolio of broadband services and hosted VoIP targeted to the small business market

Speakeasy has entered into an agreement to combine its business with Covad Communications and MegaPath, with the transaction expected to close in Q3 2010 contingent on the closing of an already-planned merger between MegaPath and Covad. Financial terms will not be disclosed.

Speakeasy has entered into an agreement to combine its business with Covad Communications and MegaPath, with the transaction expected to close in Q3 2010 contingent on the closing of an already-planned merger between MegaPath and Covad. Financial terms will not be disclosed.

As we discussed in a newsletter earlier this year, Speakeasy was originally founded as an Internet café and has doubled in size. It now offers a portfolio of broadband services and hosted VoIP targeted to the small business market. Best Buy purchased Speakeasy in 2007.

Speakeasy targets businesses with less than 100 employees, and 75% of its customers have less than 25 employees. In 2009, Speakeasy's VoIP service helped the company grow by 25%, with hosted VoIP responsible for 80% of the increase in sales.

The planned transaction will combine Speakeasy's services with MegaPath's of products and value-added services for distributed enterprises, and make them available over Covad's e broadband network. Best Buy will continue to be a minority shareholder and it will continue to sell Speakeasy services as part of its "Best Buy for Business" portfolio.

Commenting in a statement on the plans, D. Craig Young, MegaPath CEO, said: "With the additional resources, mature channels and enhancements to the service portfolio, we expect the combined companies to extend their leadership position in the SMB, enterprise and wholesale markets."

Pat Bennett, president and CEO of Covad, added: "This combination of companies will make these services available to millions of small, medium and large business nationwide directly or through our wholesale partners."

Our observations: We think the merger of these three players will provide synergies needed to better compete in the SMB space. As we discussed in our newsletter when Covad and MegaPath agreed to combine operations, the addition of Speakeasy gives added scale and an enhanced portfolio that will allow the collective organization to take on both incumbent carriers (such as AT&T, Verizon and Qwest) that are already increasing focus on the SMB market , alongside cable operators who are also upgrading products and support with integrated access, VoIP and managed services targeting SMBs.

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