BUY PASS

The best advice for service providers and vendors circling around potential merger and acquisition deals is that it's OK to take it slow — or pass up an opportunity. Company shoppers have more to lose than gain in this market. If you just went by share prices, you'd think there were bargains available. 

For example, you could buy Qwest for about the same amount as its annual revenue stream. But that ignores the debt loads weighing down balance sheets. Because most telecom debt is trading at pennies on the dollar, it doesn't make sense to pay full value (“par”) for it, which is what's required when buying a company whole. Asset purchases make more sense, but why buy now when assets could be cheaper in another 12 months? To top it off, in this environment jittery investors and board members are more likely to kill a deal that doesn't immediately spell synergy. (Just ask Hewlett-Packard and Compaq.) 

But the stimuli to a renewed interest in M&A could be hiding around the bend. The Financial Accounting Standards Board recently put an end to “pooling of interest” transactions, which means parties can base payment on some future earnings benchmark. And the Federal Reserve's interest rate cuts will allow companies to refinance debt at lower rates, improving cash flow and balance sheets. But it will take a while for these catalysts to overcome the inertia. 

That's OK. Consolidation by M&A isn't necessary. Whether M&A deals get completed or not, the number of players per market will shrink. Existing players will be better capitalized, and margins will increase. And that's what this industry could really use.