The Report on Business magazine has an interesting profile on Telus CEO Darren Entwistle, which offers some insight into arguably Canada's most dynamic telecom executive. It includes the surprising contention the 44-year-old may have plans to walk away from telecom in four or five years to teach strategy and leadership at a U.K. university - as opposed to moving on to bigger and better things such as CEO of a U.S. RBOC. The only thing I would quibble about in the story is the claim Entwistle “blew some of his regained credibility with a doomed $1.1-billion bid for Microcell” in 2004. Everyone knew Entwistle wanted Microcell out of the wireless game because its discounting tactics were hurting the industry's operating margins. By making the bid, Entwistle put Microcell in play and Telus in a win-win position. If the bid succeeded, Telus would become an even bigger wireless player in a fast-growing market. If the bid failed (which happened when Ted Rogers made a $1.4-billion bid), the market would be consolidated and market conditions would improve. Entwistle didn't blow his credibility; he made a brilliant strategic move that didn't cost Telus a dime.
Telecom Acquisitions, Financing
Mitel: IPO Deja Vu
For the second time in 27 years, Terry Matthews is taking Mitel public. This time around, the company is apparently looking to raise $150-million for “general corporate purposes”. While Matthews is well-respected as Canada's leading telecom entrepreneur, it is important that potential Mitel investors realize the Ottawa-based company is posting large losses as it pours money into R&D,sales and marketing to compete with heavyweights such as Cisco, Avaya and Nortel in the IP communications market. For history buffs, Mitel originally went public in 1979 after it was started six years earlier by Matthews and Michael Cowpland, who later went on to start Corel Corp.
Alcatel-Lucent Tie the Knot. Really!
The speculation is over: Alcatel and Lucent have officially merged (unofficially Alcatel is buying Lucent given its shareholders will have 60% of the new entity) to create a $25-billion wireline, wireless and services behemoth. It is interesting that Alcatel is purchasing Lucent at a discount to Friday's closing price. Patricia Russo will become CEO while Serge Tchuruk will be non-executive chairman. AlcaCent also plans to eliminate 8,800 jobs, or 10% of the workforce, to reduce annual costs by $1.7-billion. So can we now launch the consolidation frenzy within the $336-billion equipment industry? How long before Siemens or Nokia pursue Nortel, or Huawei takes a run at Juniper or as Om Malik suggests will Juniper take a run at Huawei? For several years, the telecom equipment market has been waiting – desperately needing? – consoliation among the large players amid fierce competition, soft margins and a dwindling customer base. Perhaps fewer players is what's needed to restore some sense of fiscal health. That said, there is some healthy skepticism emerging. RBC World Markets' analyst Mark Sue said Lucent and Alcatel have distinctly different corporate cultures and any expected synergies will likely not emerge for a year. IP Democracy also has concerns about the French ownership of Lucent's Bell Labs operation, which does work for the U.S. government and security agencies.
What AT&T Breakup?
The telecom industry sure moves in strange and mysterious ways in light of the Wall St. Journal report that AT&T will unveil the purchase of BellSouth for $65-billion. It was only 22 years ago, that the old AT&T was split into seven “Baby Bells” in wake of the Department of Justice's anti-trust suit. You can't help but ask what the AT&T break-up exercise was really all about now that Humpty Dumpty has been put back together again. If this mega-deal – a foregone conclusion says Om Malik – is completed, you'll essentially have AT&T and Verizon as the last guys standing what with AT&T/SBC having snapped up Ameritech, Southwest Bell, Pacific Telesis Group and BellSouth, while Verizon acquired Bell Atlantic and NYNEX. (Qwest bought U.S. West). So what does it mean from a competitive standpoint? It certainly sets the stage for an even more consolidation in the industry as Qwest could become the next (and last) big carrier to fall. It will also create an even more fierce carrier-cable war as they wage the “Battle of the Bundle” for consumers. Perhaps it will prompt some consolidation in the cable industry if some cablecos start to believe they need to become even bigger to compete effectively with the carriers. The deal will also have an impact on the already-fragile telecom equipment market as yet another large customer gets taken out of the picture. And another angle to the deal is it will allow AT&T CEO Ed Whitacre and BellSouth CFO William Smith to continue their crusade against Net Neutrality in an even more united way. At the end of the day, the question is whether the deal is good for the U.S. telecom sector. Will it allow carriers (well, at least Verizon and AT&T) to become more efficient and competitive with cable rivals? Will this be good for residential and business consumers? Only time will tell.
From a Canadian perspective, telecom consolidation has also been in progress with several carriers (Sprint Canada, GT Telecom, 360 Networks) acquired in recent years. The question is whether there's an indepedent future for small carriers such as Manitoba Telecom Services and SaskTel? Will the market eventually be BCE, Telus and a handful of small, rural exchanges?
Update: IP Democracy highlights the combined access and DSL lines of AT&T and BellSouth, and wonders if this is what the federal government had in mind with the 1996 Telecom Act.
More (Bad) Info For Vonage IPO
Telegeography will issue its Q4 voice-over-broadband numbers today that will show the U.S. market grew by 25% to 4.5 million subscribers. While Vonage is still the largest provider with 1.2 million customers, Time-Warner is quickly closing the gap as it added 246,000 subscriber to end the quarter at 1.1 million. Cablevision is third at 731,000 while Comcast is fourth with a disappointing 202,000. Telegeography expects there will be 7.9 million customers by year-end while revenue will jump to $2.1-billion from $1-billion. On the face of it, the growth appears to be good news for Vonage but it is increasing obvious the cablecos are quickly closing the gap as they launch more aggressive marketing campaigns. It seems clear Time-Warner will pass Vonage in the first-quarter as the largest VoIP broadband provider. This is not the best news for Vonage and its underwriters as they work to complete Vonage's $250-million IPO. For potential investors, the reality of heightened competition from well-financed rivals does not bode well for Vonage, which has been bleeding as its spends like a drunken sailor on marketing to acquire new customers. Does this mean Vonage could pull the IPO? It's highly unlikely but there is a possibility the offering price could be dropped to get the deal done, which means even more dilution for existing investors who have more than $400-million of private equity in play. For another take on the Telegeogaphy numbers, check out Om Malik's post, which includes some of the charts from the Telegeography report. Another must-read is Om's post on Vonage's troubling churn after he poured over the company's S-1 filing with the SEC. Om also has a post today on the oh-so-quiet departure recently of Vonage's chief marketing officer, Dean Harris, who I guess was the man behind all that online spending.
Vonage's Churn Concerns
For anyone questioning about Vonage's IPO prospects, Om Malik has poured through the S-1. It reveals, he said, "more red-flags that the great Boston dig". In particular, Om focuses on Vonage's churn – the number of customers who leave each month – and the cost to replace them. The more I read about the Vonage IPO, the more I wonder how they can convince anyone to climb onboard. If you're an institutional investor, do you invest in a money-losing company in an ultra-competitive market at a time when some economists are saying the bullish market is over and a recession may be required to bring the U.S. economy back into equilibrium? That said, anything can be sold at the right price so it will be fascinating to see Vonage founder Jeff Citron in action during the road show. I'm no analyst but if there was skepticism about the Google IPO (and we should remember all those smart institutional investors who stayed on the sidelines), then the Vonage IPO is going to be an extremely tough sell.
