Mergers a good/bad idea these days

Last year, mergers dramatically altered the balance of power among wireless carriers. Two carriers, Verizon Wireless (www.verizonwireless.com) and Cingular (www.cingular.com), began life as the nation’s No. 1 and No. 2 carriers, respectively. But that was just the conclusion to a whirlwind year of consolidation: Among other mergers, Qwest (www.qwest.com) bought U.S. West, and Aerial and Omnipoint joined VoiceStream (www.voicestream.com).

If 2000 was the year to grow by mergers, then what about 2001? Given the tumultuous economy, growth by survival perhaps.

This year’s lone major transaction was Deutsche Telekom’s (www.telekom.de) acquisition of VoiceStream and Powertel. Additional mergers or acquisitions, especially of smaller and mid-sized carriers, seems like a great idea at first, given how cheap carriers are. Too bad no one has any money.

“Even though smaller operators might be available at an attractive price, nobody has the resources to go out and buy them,” said Herschel Shosteck, Shosteck Group (www.shosteck.com) president & chairman of the board.

The drain on carriers’ wallets comes from “the meltdown of the asset value of telecommunications vendors and operators,” Shosteck said. Whatever money most carriers have left will be spent on transitioning to next-generation technologies.

Foreign carriers likely won’t make any more acquisitions in the American market as this monetary drought isn’t limited to the United States. “They (foreign carriers) are overwhelmed with debt,” Shosteck said. “They’ve been downgraded from the best credit ratings to one notch above junk.”

So with 2001 half past, it’s a safe bet that the faces among the top 10 U.S. carriers will be the same at year’s end.

Carriers have, thus far, reacted well to the market’s fallout, thereby positioning themselves well for 2002, or whenever the economy recovers.

“From a financial viewpoint, they are going to be in better shape in six to 12 months,” Shosteck said. “Even though they are not experiencing a slowdown, they are reacting to the slowdown and therefore cutting back on their marketing and continuing to reduce their subsidies.”

Shosteck added that any of the sixth to tenth largest carriers will be possible acquisition targets.

“The key issue is going to be whether or not the acquiring operator can get management control; if they can, anyone is open for acquisition,” he said.

Alltel (www.alltel.com), the nation’s sixth largest carrier, was the subject of recent acquisition rumors. A Robert W. Baird & Co. analyst told Investor’s Business Daily (www.investors.com) that Alltel would be a takeover target if the FCC (www.fcc.gov) lifts spectrum caps. Some speculate that Verizon Wireless would be the buyer, as the two share the same network and are roaming partners. Alltel, however, has publicly stated that it is not positioning itself to be acquired, and that it wants to compete.

Other industry rumors speculate that Alltel might acquire a smaller carrier, such as Rural Cellular (www.ruralcellular.com) or CenturyTel (www.centurytel.com).