[February 14, 2005]

Telecom Mergers, Then and Now

By David Sims, TMCnet CRM Alert Columnist

Leafing through an August 2000 issue of Industry Standard – there’s a piece of nostalgia for you – this reporter came across Jason Krause’s article on telecom mergers.

This is a subject much on everyone’s mind, of course, what with SBC taking AT&T to the altar and MCI leaving Qwest there to elope with Verizon this Valentine’s Day.

The numbers sure look big, don’t they? Sixteen billion here, six, seven billion there. One almost forgets that Lucent – remember them? – acquired Internet-equipment maker Ascend for $24 billion. JDS Uniphase, optical-network equipment parts maker had just announced that it would pay $41 billion for rival SDL.

And earlier that month, as Krause writes, “ Corning was reportedly in talks to buy Nortel's optical components business for $100 billion.”

Granted that was dot-com boom funny money, but still. Lucent had just bought out optical networker Chromatis, paying $4.6 billion for a company which had generated zero revenue in its mayfly existence. That March Nortel had plunked down $6 billion for no-income Xros.

The operative idea behind such drunken sailor deals, of course, was the future. Grab the Next Big Thing, be first, first, first with new, new, new. If you saw a kid in a garage tinkering with some electronics who had a good idea, you ran over with your checkbook, signed a check and handed the kid the pen. It’s the New Economy, the old rules are out.

Were they ever. “To acquire SDL, JDS Uniphase agreed to pay roughly 100 times what SDL is expected to generate in revenue in the coming year,” Krause comments acidly. JDS was already on a five-year amortizing schedule for its $18 billion acquisition of San Jose, Calif.-based E-Tek earlier that year.

Lucent is still struggling. Their net income for the first quarter of fiscal 2005 fell 50.1% to $174 million, down from $349 million in the year-earlier quarter. Earnings per share for the quarter were .04 cents, compared to .07 cents a year earlier.

“Perhaps at some point Wall Street's hunger for all things telecommunications-related will abate, and companies will depend less on mergers and acquisitions to help them expand,” Krause hopes. “But for now, acquisitions and creative accounting are just too easy a path to growth.”

And to failure. Bernie Ebbers at WorldCom-MCI learned the hard way about creative accounting, and AT&T, once the largest firm on the planet by pretty much any standard you wanted to use, had a history of bad relationships. It bought NCR in 1991 and later had to sell at a huge loss. It made ill-fated forays into cable in the late 1990s, paying over $100 billion for MediaOne and TCI. Along the way it managed to miss wireless, the Internet and computing.

Of course the Verizon-MCI and SBC-AT&T mergers are on more solid ground than JDS-SDL or Nortel-Xros. The SBC-AT&T deal created America’s largest telecom company, with $70 billion in revenues and over 200,000 employees (currently, the expected slashings haven’t happened yet.). But we can only wish the newlyweds better luck than they had in their previous marriages.

David Sims is contributing editor and CRM Alert columnist for TMCnet.