Posted 4/9/10
By Dan Baldwin, TA Executive Director, 951-251-5155 email
I'll be the first to admit that while I have a business degree from a real college, I'm no mergers and acquisitions wizard. I do own my own business though and outside of making my clients happy I pretty much just think of two things all day long, "How can I cut costs or increase revenue?".
I imagine most business owners think the same way so I applied that thinking to MegaPath & Covad. In reading through the press releases on the subject, I drew the conclusion that Covad was the network of choice that Covad put a lot of their customers on to them provide all the MegaPath managed solutions. By merging with Covad are they going to really going to lower their wholesale costs all that much? What do they get by "owning Coved" that they didn't already have? "Fewer network options and more headaches", I initially thought. Why buy a car when you can drive the one you like whenever you want anyway, right?
What about Covad, what are they getting from MegaPath? This makes more sense to me. MegaPath has quite the managed services sales machine. Dan Foster, Ross Anderson and Valerie Scharlin Richards have been especially effective out in "agent land" land spreading the good word about leading with managed services in order to pick up the network without giving away commodity pricing.
The third party to the transaction is Platinum Equity which bought Covad for a 60% premium in 2007. Platinum owns many telecom companies as well as many non-telecom companies. When I asked a couple people somewhat familiar with Platinum what Platinum's long term vision was with all the telecom purchases, it was suggested to me that Platinum was not trying to specifically build the "telecom super-company of the future" so much as they simply liked picking up good deals when they found them. Platinum does seem to be known for an abililty to make their companies very operationally smooth. Does that mean lay-offs for staff of either company?
It's hard to say what the new "co-owners" (MegaPath's owners & Platinum) of the new merged company will do regarding layoffs or the agent channel. I assume the MegaPath board must like Platinum or they would not have agreed to go "halvsies" on the merged company. If you look at all the telecom companies Platinum owns, I can't say that any have an overly robust agent program and Covad's agent program has not really set the agent world on fire since Platinum took over the reigns in 2007.
Does that mean Platinum doesn't like agents or that MegaPath will become more agent hostile? I would not draw that conclusion - but I would also not say that the merger is going to make them more agent friendly. If anything it will make them more "agent realistic". I think the agent channel of the new merged company will get all the love and attention the margin they bring in merits. I think that's what the owners of MegaPath probably like about Platinum, they're channel neutral - whichever channel brings in the best margin wins.
But these are just my thoughts and I'm just a telecom sales guy that's been around a long time. Personally, I prefer the opinion of people who earn more than I do so I asked several what they thought. Their opinions follow down below at the end of this post.
Some have predicted that the merged company will purchase additional firms. What firms are good targets? NewEdge maybe? Many (inclucing myself) often see MegaPath & NewEdge in the same market going after the large, multi location retail and quick-serve restaurant space to convert them all to IP.
How about Granite, BullsEye or Ernest? All three have a nice base of large multi-location customers that may need to be rolled into MegaPath's multi location IP solution sooner or later, right?
How about an IP-PBX company. PAETEC bought Allworx and that seemed like a pretty smart move especially when you're trying to corner the multilocation space.
Questions, questions, questions...
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Interview With Dan Foster of MegaPath
In search of answers to all the questions I called Dan Foster, MegaPath's Chief Sales and Marketing Officer. Click the player below to hear what he had to say.
Click the player below to listen now. Click here to download the MP3.
Interview Questions Download the MP3
Covad President & CEO Pat Bennett said it best, "This is a merger of opportunity as opposed to a merger of necessity". MegaPath will be retail and Covad will be wholesale. MegaPath CEO Craig Young will be the senior guy running the business.
Focus on partner channel will not change. Covad brings great operational support.
2. (4m:30s) What percentage of MegaPath deals went onto Covad?
MegaPath has been one of Covad's largest customers.
3. (6m:30s) What is MegaPath getting that they didn't already have?
Current Covad agents managed services. MegaPath agents get more tools and a half billion dollar operating company. Unlike MegaPath competitors we won't have to keep asking investors for more cash. No more "small company" feel.
4. (9m:20s) Will there be one or two agent channels?
There are many details left to be worked out. Probably just one.
5. (10m:10s) How big will the direct sales force be that the agents will compete against?
The retail side will partner with and compliment the agent channel.
6. (13m:20s) Who will this merger threaten?
We've got a nationwide Broadsoft voice platform on a carrier-grade MPLS network with managed and security services. We don't really have that many competitors. XO, PATEC or Time Warner Telecom.
7. (14m:50s) The next acquisition?
More vertical, more horizontal or more distribution. Looking for unique distribution, customer or network assets. (But probably not equipment).
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Dan Baldwin's Conclusion
In listening to the interview one more time I'm left with the impression that MegaPath saw a merger with Covad as a way to tap into a "cash cow" of sorts to fund future growth needs. They also instantly got the ability to "double in size" so they might not be considered a niche player but a grown up nation-wide CLEC like PAETEC or XO.
Platinum Equity must really like what they see in MegaPath to hook Covad up with a company that might soak up Covad's cash. A person I spoke with about Platinum suggested though that Platinum doesn't really buy a company because it nicely compliments another they already own.
I think the bottom line is "bigger is better" for both Covad and MegaPath. The resulting company will be better able to compete in an evolving marketplace that is rewarding economies of scale and the outsourcing of managed services.
What does it mean for agents and staff of either company? Well it's never good to be a W-2 employee that's perceived as "net expense" versus "net revenue". A merger during a recession makes it even more scary considering Platinum's reputation for "stream lining operations" given they own several other telecom companies already.
The bottom line for agents? Produce more margin than the direct side and I'm thinking everything will be fine. The merger will make Platinum/Covad/MegaPath more margin focused, not more agent focused.
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Thoughts and Comments on the merger from TA Vendors and Members
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Dave Laskowski, CTG3 "I guess it makes sense from an asset consolidation perspective but not much sense from a market perspective. Whenever you combine a wholesale based company (Covad) with a retail based company (Megapath) there is going to be problems. Level3 / Broadwing is a good example of a this."
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Tom Azelby, Bandwave Systems "We do a significant amount of business with Covad and some business with Megapath. The merger is good news to Bandwave!
Bandwave Systems has had a long term relationship with both Covad and MegaPath. As a VAR our hope is that both organizations are successful in aligning their strengths. A successful merger would be beneficial for Bandwave and our Agent Partners. Over the years we have developed strong ties inside both organizations, so we are wishing them success!"
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Jeff Leshin, Ernest Communications "I believe you will continue to see Acquisitions and Mergers in the telecom space accelerate in the next several years. As margins continue to be squeezed with certain product sets, companies are forced to either evolve and expand their offerings or look for a means to exit the marketplace.
In the local line arena( POT’s) companies like Ernest should continue to evaluate their current product set and ensure they have a game plan to incorporate new technologies such as SIP that could impact their core product. We continue to add new services to our core product set to enable us to be a true one-stop provider for all telecom services.
Ernest is privately held and debt-free so we are not under any tremendous market pressure to relieve our debt or look for an acquisition as some others in our space and the traditional CLEC space might be. Ernest which is 100% channel driven, continues to look for means to grow our channel presence with our new offerings that include Wireless and a dedicated product set."
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Geoffrey Shepstone, Telecom Brokerage Inc (TBI) "MegaPath is a good company and will be a better company with the addition of additional resources from Covad. The combined company will be at a half Billion in Revenue shortly- clearly they have entered a new category of CLEC.
I think it is a great move and I am optimistic about expanding the relationship TBI has with Megapath. Additionally with the recent addition of Darren Chamberlain Director, Indirect Program (from Bandwidth) to Megapath I see a great future for the agent channel with MegaPath."
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Vince Bradley, World Telecom Group (WTG) "I think that the huge Covad network & relationships (both retail and wholesale) coupled with leading edge automation (only CLEC providing OOE for broadband, integrated access, etc.) leveraged with the Managed Services portfolio of MegaPath, specifically the exclusive VoMPLS product, that the possibilities of this merger are truly unlimited."
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Adam Edwards, Telarus "We're pretty excited about this for two reasons. From a business perspective it makes sense because the two complement each other well as has been stated. Megapath has a great managed service portfolio and Covad has a great footprint. Together they create efficiencies and are a much stronger company which we're always happy to see in our carrier partners. From a channel perspective, Megapath has been on a big upswing in the progress they've made with their channel. We're thrilled to see Covad access be available through this renewed Megapath channel.
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Dave Bailey, BullsEye Telecom "We have had wholesale relationships with both companies for years as part of BullsEye's strategy to offer national coverage and differentiated business solutions to multi-location companies.
BullsEye's offers a complete portfolio of voice, data and VoIP solutions to our customers which we believe separates BullsEye from being just a typical POTS aggregation play. When you combine BullsEye's technology and product solutions with our unparalleled billing, account team and support tools, BullsEye is in a unique position to provide truly managed services that allow customers to evolve their business and it's associated needs with one provider that can meet their technology and business roadmap requirements.
I do expect that there will continue to be mergers and acquisitions as part of industry consolidation in general. This should have less of an effect on BullsEye as we are not reliant on M&A activity to address needs as our strategy has already had BullsEye focused on offering holistic business and service solutions. Actually, the fact that BullsEye is already working with most of the companies that are being merged or acquired further substantiates that BullsEye recognized the market need for these capabilities and is already successfully offering and integrating solutions with the appropriate market and business partners.
We remain excited that BullsEye continues to be differentiated in our ability to provide national Voice, Data and VoIP solutions combined with industry leading tools and billing services to deliver a truly managed services experience for the customer."
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What Do You Think?
If MegaPath/Covad is on a buying spree, who will they buy next? will Covad's agent program go away? Is it "all good" or are dangers for agents lurking in the corners?
Please share your comments below.
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Other Articles on the MegaPath / Covad Merger
What a Merged Covad, MegaPath Means for the Channel by Kelly M. Teal, Phone+
Customer and Partner Perspectives of the Covad-MegaPath Merger, by MegaPath Blog
Covad, MegaPath Combination Signals Larger M&A Trend by Paula Bernier, TMCNET.com
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