Covad Communications Co.'s (www.covad.com) stock took a price hit this morning after announcing its intention to acquire BlueStar Communications Inc. (www.bluestar.net). At noon EDT, Covad's stock price was off $7.25 from yesterday's close of $25.25, a drop of 28.47 percent. Volume was about eight times average.
Covad said it inked an agreement to acquire BlueStar in a stock deal worth $202 million - although that figure was based on yesterday's closing stock price. A spokeswoman minimizes the significance of the drop: "With any major announcement, there will be fluctuations in the stock price," she says.
BlueStar is a direct provider of DSL services in the southeastern states, mainly in tier three markets. Covad has built its business by wholesaling to ISPs.
Robert C. Knowling, Covad's chairman, president and CEO, says the purchase of BlueStar is a shift in strategy, brought on by Covad's frustration with its ISP partners' performance in second- and third-tier markets. "We're not getting the same traction in tier two and tier three markets that we have in tier one markets," he says.
Knowling says he plans to interfere very little with BlueStar's business plan - except, perhaps, to encourage BlueStar to speed up its entry into tier two markets. There will be channel conflict in some markets between BlueStar and Covad's wholesale partners, Knowling concedes.
"This is not a tweak; this is truly a flip of the (Covad business) model in the tier three space where BlueStar is," Knowling says. "I look forward to the channels meeting in tier two where there isn't just a perception of a channel conflict, but actual conflict with people meeting in the street."
Knowling says the digestion of BlueStar - which he expects to take 60 to 120 days - will result in fewer access lines being added by Covad for the second quarter. Instead of the previous estimate of 300,000 lines for the quarter, Knowling says, he expects Covad to add 245,000 lines. However, he stresses that revenue projections for 2000 remain the same and that he expects revenues for 2001 to be higher than expected.
