WHO ARE THESE GUYS, ANYWAY?

NTT Communications' $5 billion purchase of Verio, a Colorado-based Web hosting company, raised more than a few eyebrows in the telecom industry as the Japanese telecom power began flexing its global muscle for the first time in the U.S.

The deal was notable simply because it was an all-cash deal, unusual for Internet-oriented transactions, which usually involve an exchange of stock. Perhaps even more notable are the comments from Verio regarding the decisiveness of NTT Communications, which made the offer shortly after Verio completed testing a product that will launch in Japan next month.

"As this transaction approached, we were blown away by how fast they moved," said Sean Brophy, Verio's vice president of corporate development. "They did a lot of this work in less than 30 days where they are putting down $5 billion in cash." Such speed, while common in lesser-valued transactions, is virtually unheard of when incumbent local exchange carriers (ILECs) are involved.

Although NTT Communications is a long-distance company, it is a wholly owned subsidiary of Nippon Telegraph & Telephone, which was Japan's sole provider of local calling for generations and is majority owned by the Japanese government.

NTT Communications already was on Verio's board, having bought about 11% when Verio went public in 1998. And NTT Communications' actions surrounding its initial investment in Verio were just as impressive as last week's deal, Brophy said.

"In less than 30 days, they were able to go through the whole selection process with us to agree to investing $100 million at the time of the IPO and do all that negotiation and work the decision-making within the company," he said. "That was a wake-up call to us because we had been dealing with the incumbent [LECs] in this country and hadn't seen anything like that."

Verio's deal with NTT Communications could be a catalyst for a philosophical change among U.S. carriers, Brophy said.

"I admit that there has been this issue with our local telcos, but I would say this is going to be a signal as to how bold they may need to be as time proceeds if they really want to step up and believe in the IP business," he said.

Others in the industry disagree.

"It's another competitor out there that we're going to have to keep our eyes on," said J. Thomas McGrath, president of SBC DataComm. "It doesn't change our strategy."

And NTT Communications' entry into the U.S. market is not of particular concern to McGrath, who compared the significance of NTT's purchase of Verio with the formation of global joint ventures such as Concert and Global One.

"They all present some form of competition, but very few have been long-lasting," he said.

NTT Communications seems determined to be a long-term player in the IP market. Verio's experience will enable NTT Communications to make additional offerings and develop new global IP-based services such as IP virtual private networks and global content caching.

But the trump card in the play is the ability to integrate NTT Communications' IP network in Asia with Verio's presence in the U.S., where it hosts more than 400,000 Web sites. Expanding its IP network into Europe is a stated goal of NTT Communications.

"In the arena of global business, we have been focusing on expanding network services globally and providing them through IP networks," said Masanobu Suzuki, president and CEO of NTT Communications. "By combining the IP networks and services of the two companies, we will be able to offer `one-network' IP solutions under a single-policy operating structure."

Although outsiders might worry about the potential for corporate cultural differences between Verio and NTT Communications, the world's largest carrier, Brophy believes the deal will be beneficial to his company.

"We would not have gone forward had we felt we were going to be at a clash," he said.

"In fact, we have been very surprised at the entrepreneurial energy that exists in that company, and we have gotten along quite well," he added. "We are actually in much better shape with these guys than with some of the RBOCs, to tell you the truth."

KPN's failed attempt to merge with Telefonica and NTT DoCoMo's subsequent investment in KPN's mobile arm indicate some major worldwide trends.

One trend shows European operators - often with low valuations - spinning off different segments of their businesses. "They're doing it in order to survive against the new entrants," said Zoe Windsor, senior analyst with The Yankee Group Europe.

Once those operations are separate, the companies may look to combine them with similar businesses in other countries. That strategy parallels tactics used by Vodafone AirTouch, which has focused on acquiring or investing in wireless concerns across Europe. Some speculation surrounding talks between KPN and Telefonica had those operators focusing on joining their wireless arms.

Although the 15% stake that NTT DoCoMo took in KPN's mobile business will boost mobile operation, Telefonica presented a much greater opportunity, Windsor said. Together, Telefonica and KPN could have bid on universal mobile telecommunications system (UMTS) licenses around Europe, essentially eliminating a competitor. They also would have had a better chance at buying Orange, the much-wanted U.K. wireless operator that is for sale.

Financial analysts in Europe have not taken the news of the NTT DoCoMo investment well, mostly because it pales in comparison to the possibility of the KPN/Telefonica deal, Windsor said. Nonetheless, NTT DoCoMo's investment can be valuable if the Japanese carrier shares some secrets of its i-mode wireless data offering.

Despite the NTT DoCoMo investment, KPN is said to be in talks with a number of other European players in hopes of fashioning a similar deal to the Telefonica proposal, Windsor said.

The NTT DoCoMo investment also is indicative of the trend toward going global. NTT DoCoMo has been mentioned as a possible suitor nearly every time a European operator has been for sale during the past couple of years. The investment in KPN marks NTT DoCoMo's first foray into Europe.

"It's about NTT [DoCoMo] wanting to get a foothold in the European market," said Jake Saunders, regional director for The Strategis Group Europe. Some analysts say NTT DoCoMo's stated strategy of investing in - but not buying - operators is solid because it allows the company a quicker entrance into new markets.

Though the investment is small, it can open a number of doors for the Japanese operator. KPN has stakes in a number of operations around the world, including a 77% share of German mobile operator E-Plus Mobilfunk.

Supporting KPN also can open other European doors for NTT DoCoMo. "If you want to be in the wireless field in Europe, you need UMTS licenses," said Eric Kintz, the head of U.S. e-commerce and telecommunications practices for Roland Berger & Partners.

Because E-Plus is an incumbent, it likely will win a license in Germany's UMTS auction. Many analysts speculate that NTT DoCoMo intends to help KPN buy Orange, the U.K. operator that recently won a UMTS license. With that auction over, the only way to get a license there is to buy an operator.

Many of the losing bidders in the U.K. auction want to buy Orange. France Telecom and Vivendi also may have their eyes on Orange. MCI WorldCom failed to win a license in the U.K., and President and CEO Bernard Ebbers said that the company is interested in purchasing Orange.