Merger Mayhem

The newly uneasy relationship between the telecommunications industry and Wall Street appears to have been forged in the land grab of the late 20th century, when investors first encouraged and then punished massive competitive network buildouts. History now tells us that building a national network before building a customer and revenue base is a formula for large-scale failure.

But history hasn't looked as critically at another predominant aspect of the last several years in telecom: the megamerger. Beginning with the SBC Communications-Pacific Telesis deal in 1996, the combining of major network operators has become a significant force for reshaping the public network. With each merger announcement there has been significant gnashing of teeth among some observers, usually those most concerned with the impact of megamergers on customers and the competitive market.

The steady mantra of the merger-makers has been that these deals represent what is best for everyone, customer and shareholder alike — but by far most importantly, what is sound financial policy for the companies involved. Editor Dennis Mendyk and Senior Writer Steve Smith did a close examination of the post-merger performance of major industry players and found that this is rarely the case.

What is particularly interesting to me is that some of the worst performances were turned in by mergers that were greeted with the loudest cheers at the time of announcement — the AT&T/TCI deal being first and foremost in this category. At the same time, a merger that left many scratching their heads — Qwest/US West — has proved to be financially sound for the acquiring company. Clearly, it's easier to put forth a bold and promising business plan than it is to execute one.

Our analysis isn't likely to stem the tide of major mergers within telecommunications any more than the failure of some announced marriages, such as Sprint and WorldCom, has halted speculation of future partnerships for all involved. Our goal is to dispel one of the major myths that helps fuel this practice by showing that, whatever other goal is put forth, an increase in shareholder value is never assured when two megaplayers merge.

What we can't show is how any of these companies might have performed had they not become enmeshed in a merger process notorious for sucking up time, talent and energy among even successful partners. It is impossible to know, but easy to speculate, that MCI would have remained an industry leader in identifying and offering new services had it not been pulled into the patchwork quilt of network operations that is WorldCom. It is also impossible to know, but easy enough to surmise, that Ameritech's current problems in delivering basic phone service of sustainable quality stem in part from the almost two-year period when the company was virtually stagnant while waiting for its merger with SBC to be approved.

These premises remain unproven, but should be considered by those contemplating future matches. At the very least, shareholders should be warned: This way, losses lie.

Perhaps no one does mergers as well as Cisco, and many of its acquisitions are intended to take the company into new markets. On page 46, Senior Writer Sarah Schmelling chronicles the impact Cisco's sudden entry is having in the storage area network arena. This issue's Revolutionaries section introduces you to two of the individuals who were around to help invent the Internet — Services Editor Dawn Bushaus tells you what Stephen Crocker and Joel Halpern are up to these days. And Senior Writer Jonathan Blum details the path of Rocco Commisso as he works his way into the notoriously clubby world of cable TV.

Copyright © 2004 Ziff Davis Media Inc. All Rights Reserved. Originally appearing in The Net Economy.