Feb 14, 2005 12:00 PM,

The new look of M&A

By Tony Surak

Consolidation is no longer shocking in the conventional telecom industry. The recent series of carrier mergers — Cingular/AT&T Wireless, Sprint/Nextel, Alltel/Western Wireless and, most recently, SBC/AT&T — should come as no surprise to anyone who follows the sector. These carriers are tired of beating each other up for customers and pushing prices to points where they're no longer able to make money, so they become mega-carriers that don't have to.

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But there is another sector — one much more under the radar — that also is ripe for consolidation.

In the mid-1990s, the ISP business was blossoming but segmented. There were a few national ISPs such as UUNet that served businesses, and some consumer-focused ISPs, such as Prodigy. There were also thousands of regional ISPs, all serving their local markets for a then growing and curious need for Internet access: Buy a server, get connected with a PRI, set up a billing system in Lotus 123 and you were in business as an ISP.

Then Wall Street came in to roll up the ISP market. Verio is an example of a company that was built through the acquisition of many smaller ISPs, coming together to build scale in order to survive the inevitable market shakeout.

This year could see something similar in the hosted PBX provider space. Over the last four years, since the peak of the CLEC bubble, many providers have quietly built solid businesses offering hosted PBX services to the business market, typically in one town or city. These firms are not unlike the ISPs of the 1990s: Purchase a feature server (or build your own using open source), create a billing system in Excel, develop a user portal and you can offer small and medium-sized businesses an alternative to buying a premise-based PBX or key system.

Perhaps investors will notice the opportunity to pull some of these hosted PBX providers together to leverage their positive characteristics: sales and operations best practices, back-office billing and support systems and improved pricing power with suppliers. A multicity provider now can provide an attractive option to businesses with locations in several surrounding markets — and the established carriers certainly aren't demonstrating the desire to go after this market.

The recent formations on the mega-carrier side had to happen sooner or later for those players to establish some stability in their money-losing segment. Less anticipated is the eventual combination of smaller, growing entrepreneurial firms. Who knows — perhaps one of them will become one of the giants of 2006.