Although hurdles remain, it seems likely that Verizon will finally succeed in its bid to acquire MCI, culminating a frenzied period of industry consolidation that, while painful in the short term, will lead to stability and innovation.
MCI last week accepted Verizon’s latest bid of $7.6 billion and rejected an overture from Qwest for almost $1 billion more, saying Verizon was a better strategic fit. The merger will create a powerhouse with some $90 billion in revenue, a sophisticated national network supporting a range of enterprise services and a territory rich in global corporations.
It will be a strong competitor to Sprint/Nextel, which inked a merger deal late last year, and to SBC, which recently scooped up AT&T for $16 billion to form a company with roughly $70 billion in revenue.
The value of these deals reflects the economics at work in the troubled long-distance business. For $7.6 billion, Verizon is acquiring a company that had revenue last year of $21 billion, while for $16 billion SBC takes home AT&T, which had $30 billion in 2004 sales.
Of course neither MCI nor AT&T turned a profit last year, with MCI posting a loss of $3.2 billion and AT&T ending the year $9.5 billion in the hole (both companies have roughly $6 billion in debt). What’s more, the top line numbers for both companies have been trending in the wrong direction for several years – MCI revenue last year was down 15% compared with 2003, while AT&T sales were off 9%.
It is clear the current long-distance model couldn’t survive anymore, so ultimately consolidation is good for the industry and good for the buyer.
While some analysts question if the reduction in the number of players will result in increased prices, it seems more likely that a handful of national, viable, similarly equipped competitors will fight like the dickens for big business. What’s more, the expanding reach of the big guys might make it possible to consolidate some contracts and get bigger discounts.
Longer term, the fact that these deals are reshaping the landscape probably will demand the rethinking of core telecom regulations and perhaps a significant reduction in those regulations, moving telecom closer to true market competition.
All this, of course, is ignoring the short-term headaches and problems that will result from these mega-mergers. The next two years will be painful. But once the digestion is completed, we can expect serious competition to ensue and more emphasis on innovation.
