The vultures are circling

At Networld+Interop in Las Vegas this year, one of the most talked about booths had absolutely nothing to do with Cisco routers, Microsoft software or Lucent switches. It was the massive Mercedes-Benz booth featuring a series of new models (cars, not booth babes).

The idea is striking in its simplicity and brilliant in its concept: Show off cars to a bunch of networking geeks flush with options and no evidence that they are spending their money on the latest fashions from Milan. The company was a year too late, though. Booths featuring luxury cars would be indicative of an industry overflowing with cash and smug with the knowledge that market capitalizations are sky high.

A more likely display at next year's event will feature investment bankers and other moneymen (and on rare occasions moneywomen) hawking different parts of companies they have collected over the past 10 months.

Over the last few weeks, BT has been the target of two different bids by investment banks. The first came from Babcock & Brown for BT's local loop assets. The proposal, which was more than $11 billion, included the provision that the investment bank would set up an organization to lease back capacity to multiple carriers, including BT.

The second overture arrived last week from a consortium led by German investment bank Westdeutsche Landesbank Girozentrale, which offered up $25.7 billion for the whole kibble.

One motive behind the preemptive bids might be the fact that BT has said it would break itself up, but I have to wonder whether the vultures are circling.

Can it ever be a good sign when investment banks are interested in buying up assets in your industry?

Banks have as much interest in running a local loop network as Verizon does in taking the helm of the Yankees. Banks of any kind have one interest and one interest only: profit. It's programmed into their DNA, the same way a fruit fly thinks of birth, feeding, mating and dying all in a two-week period. They buy the assets, spin them off, pocket profit and go away. Yes, there are casualties, but everyone knows they're coming.

To a large extent, the moneymen have always been among us, and VCs have played a lead role in the expansion of the telecom market. For the past five years, the bankers have been the guys that still run around Supercomm in sweltering Atlanta with suits and ties and host dinners at stuffy, dimly lit restaurants for anyone who's ever hinted they might go public. It also has been standard procedure for lenders to have a seat on the board to make sure the CEO isn't funneling the cash into his personal account. But now the moneymen are coming out of the woodwork and demanding a say in the operational side.

Earlier this month, Scott Forstmann, who isn't really an investment banker but could play one on TV, gave McLeodUSA $100 million in cash via his Forstmann Little private equity firm (Telephony, Aug. 6) . This is on top of the $1 billion the company already had dumped into the Iowa carrier. The difference this time around and Forstmann made no bones about it is that he's named four board members and appointed himself chairman of the executive committee to keep an eye on his cash. The casualty was former CFO J. Patrick Lyle, who “retired” at the ripe old age of 47.

Now I'm not opposed to those supplying the money having a say in how it gets used. But what does it say about an industry where investment bankers and private equity firms begin taking the lead in operational issues? Are the vultures circling?
Contact Vince Vittore at vvittore@primediabusiness.com