MegaPath/ Speakeasy merger targets growth, cost reduction

Managed IP communications provider MegaPath’s plan to create a new category of service provider — the managed services local exchange carrier, or MSLEC — gained further momentum yesterday as the company announced plans to merge with Speakeasy, a provider of voice-over-IP, data and IT services.

The move comes just weeks after MegaPath announced it would merge with Covad Communications, a CLEC that over many years has established interconnection agreements with incumbent LECs in 4,00 central offices nationwide. MegaPath hopes to close both the Speakeasy and Covad deals in August.

“In putting the companies together the synergies and improved cost structure will provide the capital needed to invest in top and bottom line growth,” said Craig Young, CEO of MegaPath, who will be CEO of the merged company. He added that the merged company likely will have a wholesale unit as well as a retail unit targeting business customers.

Although both MegaPath and Speakeasy target the managed IP communications market, Speakeasy’s focus has been on the small- and medium-sized business market, while MegaPath has focused about 50% on that market and 50% on larger enterprises. And although MegaPath has some ILEC interconnections, it has largely relied on a partner network — including Covad — for last-mile connectivity. The Covad acquisition will give the merged company the ability to rely primarily on its own last-mile facilities and to control the communications link end to end.

That not only should improve the company’s cost structure, but it also paves the way for service innovation, said Bruce Chatterley, CEO of Speakeasy. While declining to provide specifics, Chatterley said new innovations “will take the form of product bundling and unique delivery mechanisms, and now customers can see our business from the outside and how they interact with it through the Web or other mechanisms.”

Chatterley added that, “Because we’re a facilities-based last-mile provider, we can do things between applications and the network that are hard to replicate if you’re not the owner.”

In rationalizing the product lines of the three companies, Young said the emphasis would be on the highest-margin, highest-growth offerings first. “In our planning process, we’re doing a lot of work around these questions — what are the best growth and margin plays,” he said.

Another company affected by the planned merger is consumer electronics retailer Best Buy, which owns Speakeasy. Chatterley said Best Buy originally invested in Speakeasy as a means of keeping tabs on the business market. As a minority owner in the merged entity, Best Buy will continue to have that opportunity, he said.

At the same time, he said the merger “puts Speakeasy where its growth isn’t constrained by Best Buy in terms of scale.”

What the new company will be called has not been resolved, but Young said he expects to have an answer by the time the merger closes.