Now that Covad Communications and MegaPath Inc. are on their way to becoming one company, expect other competitive service providers to consider similar transactions. For months, analysts have said CLECs need to keep consolidating as the Baby Bells and cable operators hone in on business customers. And in the days after the Covad-MegaPath announcement, Craig Young, MegaPath’s CEO, who will become executive chairman, made several statements to reporters indicating that Covad and MegaPath will continue M&A activity. And one rival springs to mind.
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| Covad CEO Pat Bennett will retain that role and title after the deal’s close. |
“This may not play so well for New Edge Networks,” said Brian Washburn, network services research director of Current Analysis. “It and MegaPath both have very similar portfolios and similar architecture.”
Other observers agreed that the combination of Covad and MegaPath may indeed spur new talks; they said a slow economy often pushes businesses to bulk up during a recession so they can emerge from it with more strength.
“This combined entity makes a very powerful player,” said Dan Foster, chief sales and marketing officer for MegaPath.
New Edge did not return a request for comment about potential M&A plans.
‘One of the More Interesting Deals’
On March 31, Covad and MegaPath said they’ll merge as soon as they secure all of the necessary regulatory approvals, which they hope to have by the third quarter. They did not divulge the financial details, since both are owned by private investors: Platinum Equity runs Covad and MegaPath’s backers consist of financiers well known in the telecom sector, including Columbia Capital, Fidelity Ventures and U.S. Venture Partners. Covad’s revenue stats are hard to pin down; however, according to Inc. Magazine, MegaPath had $151 million in sales in 2008. In terms of reach, Covad boasts more than 4,400 central offices and MegaPath claims more than 19,000 direct SMB and enterprise customers. Working with each other, they’ll forge what they call a managed services LEC, one that SMBs and enterprises should find appealing.
The transaction is structured as a union, not a takeover. That means the board, led by MegaPath’s Young, must make collaborative decisions. In addition, Covad’s business model focuses on access. And MegaPath will layer its in-demand managed services on top of that nationwide footprint. So, sources say, if the two make the most of each other’s strengths, and minimize weaknesses, they’ll bring serious heft to the competitive service provider community.
