This article originally appeared in the November 2010 issue of INTERNET TELEPHONY

The COMPTEL (News - Alert) show in mid September started off with a bang when keynoter Arunas Chesonis stepped on stage. PAETEC earlier that day had announced its intention to acquire Cavalier Telephone. But while the deal provided a nice exclamation point for the PAETEC CEO’s speech, news of the acquisition itself wasn’t really much of a surprise. That’s because M&A action in service provider circles has been brisk in recent months.

The PAETEC-Cavalier news wasn’t the only telco acquisition revealed in September. That same month Massachusetts-based metro fiber and bandwidth provider Lightower Fiber Networks announced it would buy New York-based dark fiber network builder Lexent Metro Connect.  Around the same time Lightower completed its previously announced acquisition of Veroxity Technology Partners, a provider of fiber-based data and Internet connectivity. September also marked the close of a three-way merger of MegaPath, Covad and Speakeasy. The company, which provides businesses of all sizes with voice, data and security services over its nationwide IP network, operates under the MegaPath name.

A month earlier broadband wireless service providers Airband and Sparkplug announced their plans to merge. Meanwhile, Windstream (News - Alert) revealed plans to snap up Q-Comm subsidiaries Kentucky Data Link and Norlight. The summer also saw Windstream close its acquisition of Iowa Telecom; that followed Windstream’s close of its NuVox purchase in February and of its Lexcom buy in December.

Of course, all these deals pale in comparison to CenturyLink’s plans to buy Qwest in a $10.6 billion stock swap, which will place the once little-known telco in the No. 3 U.S. telco position, behind AT&T (News - Alert) and Verizon. CenturyLink (previously CenturyTel) last year acquired Embarq, the former local telephone operations of Sprint.

And there may well have been other service provider consolidation plans unveiled between the time this issue went to press in early October and this November issue date.

While every deal has its own unique justifications, clearly, these acquisitions are all about scale.

Mergers and acquisitions can result in larger network footprints and broader product portfolios to enable a service provider to target more and, sometimes, larger customers. That can position a company to better compete with incumbent service providers and, potentially, rely on the ILECs less for access and transport services.

Bigger companies are also often able to get better per-unit prices from their suppliers given their higher volume buys. Size also matters when it comes to a company’s ability to raise funds and forge partnerships.

“Any person that’s going to compete against AT&T, Verizon, Qwest, you really need to have a balance between special access, circuits, your own fiber bypass and your own wireless bypass,” Chesonis said in his COMPTEL keynote speech. “It’s really to build more scale for most of us who compete against them.”

The $460 million cash acquisition of Cavalier, a private company in which Boston private equity firm M/C Venture Partners holds the largest stake, will add nearly 17,000 fiber-route miles to PAETEC's network footprint. That will provide PAETEC an alternative for last-mile connectivity to customers and reduce overall expenses through improved cost structures and network grooming.

"This transaction offers clear shareholder and customer benefits by increasing the scale of our business and creating a significant operating synergy opportunity without materially changing our capital structure," says Keith Wilson, chief financial officer of PAETEC.

With the Cavalier purchase comes the company’s subsidiary Intellifiber Networks, which is one of the largest network providers in the nation and offers service provider, enterprise, and government customers private network solutions, low-latency routing, SONET services, wavelengths, Ethernet, and other data solutions. Intellifiber is the source of the above-referenced 17,000 route mile fiber network, which represents more than $2 billion of investment. That includes a 12,262 route mile intercity network spanning the Midwest and Eastern U.S., as well as 4,689 route miles throughout several existing PAETEC metro areas.

"This planned acquisition of Cavalier fits our strategic plan to add both fiber assets and regional density to better serve our customers and realize increased network synergies, both in the local loop and long haul," said Chesonis. "Cavalier's fiber infrastructure, network assets and corporate culture make it a perfect match for PAETEC and dramatically strengthen the company in the Eastern United States."

Chesonis added that Cavalier over the years bought some great distressed assets from Dominion Telecom, Net2000 and others, which it got at rock-bottom prices. Those acquisitions will help contribute to PAETEC’s new growth, as the company expects to have a local presence in 86 of the top 100 metropolitan statistical areas and a presence in 1,178 collocations (an increase of 95 percent) as a result of the Cavalier acquisition.

As for Lightower, the acquisition of Lexent expands its existing fiber footprint and customer base in the greater New York City region, including New Jersey, by adding more than 150 fiber route miles and over 200 commercial buildings.  Lightower also adds low-latency routes between critical New York City and New Jersey financial exchanges and data centers. With the acquisition of Veroxity, Lightower expands its fiber footprint and customer base in the Boston metro market, increases its network facilities throughout New England and New York City, and adds a national long-haul network connecting major cities across the U.S. The Veroxity network adds more than 2,000 network route miles to Lightower’s network.

In yet another effort to achieve greater scale, Airband and Sparkplug have merged. This deal created the largest fixed wireless company for businesses in the U.S., according to the company – which is headed by the former Sparkplug CEO, but goes by the name Airband.

Prior to the merger, Sparkplug offered services over its own networks in the Des Moines, Iowa; Las Vegas; and Phoenix metropolitan areas. The new Airband, however, provides a suite of voice and data services in 17 markets. Services run over Airband’s broadband wireless network and include data offers from 1mbps into the gigabit Ethernet speeds as well as VoIP services, including hosted VoIP and SIP trunking. Now Airband can not only deliver its services over a wider swath of markets, but it provides new opportunities to sell to larger business customers with offices in multiple Airband markets.

Airband CEO Mike Ruley says that wireless broadband outfits that do business in just a handful of markets are limited in the scope of their offerings to customers, as well as in their financial prospects related to the investment community. This deal, he says, helped the companies move to the next level.

“The industry needs to consolidate, simply put,” Ruley told INTERNET TELEPHONY prior to the announcement of the Airband-Sparkplug merger. “You have to have more of a physical reach through more markets to create the viability of the business. We think the business is viable; clearly it’s viable. But in order for it to be a more competitively sustainable product in the marketplace, you have to have more footprint.”

Sparkplug was a late stage VC-backed company with less than $20 million in annual revenue. The newly enlarged Airband has annual revenue in the sub-$50 million range. As part of the merger, Airband received $20 million in financing Ignition Partners, Key Venture Partners, M/C Venture Partners, MMV Financial, Silicon Valley Bank and Trilogy Equity Partners. The new financing will be used to fund growth and acquisitions.

That said, clearly many of those companies that have already been on the M&A train are still on track for more acquisitions. At the same time, some service providers that haven’t been active in M&A certainly seem open to it.

Craig Clausen, executive vice president of Chicago-based research and analyst firm New Paradigm Resources Group, says that among the companies that could be ripe for the picking are regional players like Integra Telecom (News - Alert) out of Portland, Ore., which he says has become a solid player in the competitive communications space, and wholesale service provider Pac-West.

Meanwhile, 360networks (News - Alert), a facilities-based wholesale service provider with 18,000 miles of network in the West and Midwest, is just one of many service providers that is candid about its potential interest in expanding via acquisition.

“Regional fiber assets would be nice for us to add,” Rick Coma, senior vice president of 360networks, recently told INTERNET TELEPHONY.

But not everybody agrees that consolidation – at least not on a large scale – is the way to go for service providers or their customers.

"As in most industries, some level of consolidation among telecommunications providers is good, especially in markets that are fragmented or that have numerous providers,” says Carmen Perez, president of FPL FiberNet, a wholesale provider of fiber-based services. “However, we strongly believe that too much consolidation is not good for the industry and the customers it serves, as it limits competition and innovation. And, let's face it, competition makes us all better.”

But while some might assume that consolidation of service providers will result in increased costs for customer, Clausen says that’s not the case.

“We have not seen higher prices,” he says. “Overall pricing is pretty stable, and it’s not generally affected by consolidation one way or the other.”

Clausen adds that while mergers and acquisitions can help companies expand their portfolios, it can take a while for new service offerings to roll out to new markets. That’s because sales force training and network integration are often required before extending services to new locations, and that doesn’t happen overnight, he says, adding it typically takes between 9 and 12 months.

Although there are consolidation challenges to M&A, Clausen says the fact that it’s happening now makes sense given that telecom has not been hit as hard as other areas of the economy. That has those companies that are struggling to manage their resources feeling insecure and trying to figure out what to do so they’re not caught in a real bind if economic conditions worsen. It also has those companies that are healthy and have cash on hand, or access to capital, looking at how they can become stronger so they’re in a good position when the economy recovers.

“Now is a good time to shore up operations,” he says.