NEW YORK-Recent gyrations in the public capital markets have made for splashy headlines, but they are not likely to stop telecommunications mergers unless there is a prolonged and profound slump, said Dave Rhodes, senior vice president of Daniels & Associates, Denver.
In terms of sheer size at the time of their announcement, three of the top 10 planned mergers in all sectors this year so far have been by telecommunications carriers, said Jeffrey Taylor, research director for Houlihan Lokey’s Mergerstat, Los Angeles. Despite declines through Aug. 31 in their valuations, he said the green light apparently was still on as of Sept. 17 for: SBC Communications Inc. and Ameritech Corp.; Bell Atlantic Corp. and GTE Corp.; and AT&T Corp. and Tele-Communications Inc.
And on Sept. 14, WorldCom Inc. closed its $37 billion purchase of MCI Communications Corp.
“I don’t think the stock market will have a significant impact on telecommunications equipment and services mergers, and its impact is more questionable on any real large acquisition play,” said Ragu Gurumurthy, a principal of Booz-Allen & Hamilton Inc., New York.
Mega-deals “are driven by a different dynamic” more insulated from short-term fluctuations in public securities markets, said Pete Peterson, wireless communications analyst for Volpe Brown Whelan & Co. L.L.C., San Francisco. Big carriers are looking for market share. In a converging data and voice telecommunications market, large equipment manufacturers need to assemble a full suite of technologies in order to remain competitive, he said.
“Small-cap (public) companies have been hit harder than larger companies, and this has caused their valuations to become more realistic as to their actual worth,” Gurumurthy said.
This scenario lends itself to buying opportunities for bigger players seeking to buy smaller public companies, he said.
The dampening effect that stock market volatility has on the initial public-offering market also may push privately held firms, whose investors are seeking to realize gains, into the arms of corporate suitors, Peterson said. In general, small companies are attractive targets because they can fill a technology void for a larger corporation without adding significant institutional bureaucracy and overhead.
However, the shaky stock markets and the fact that the high-yield bond markets have dried up in recent weeks means there could well be delays in and renegotiations of planned mergers, said Holt Thrasher, managing director of Broadview, Fort Lee, N.J.
Companies often tap the public -debt markets to raise cash to pay for acquisitions, although stock-for-stock transactions are more popular because they receive more favorable tax treatment from the Internal Revenue Service. Bond buyers have gotten spooked by equity market declines and are thinking twice before purchasing fixed-rate debt securities from companies whose stock market valuations are going down, analysts said.
“The [acquirer] looks minute-to-minute at the market for opportunities to lower the purchase price, but the seller gets emotionally attached to a price level. Volatility and deteriorating values in the market only work against the seller,” Thrasher said.
“The markets are punishing companies twice: once for missing their numbers from a pure earnings and revenues performance standpoint; once because when the whole market drops so does the forecast for an industry sector and company valuations.”
In the pure-play wireless carrier sector, one example of this influence at work may be Price Communications Corp.’s openness to buy Vanguard Cellular Systems Inc. for $25-$27 per share “if the deal were accretive to the earnings of the combined entity,” said Brian G. Coleman, senior telecommunications analyst for Toronto Dominion Securities U.S.A., New York.
“In our view, the purchase range … would appear low … ” Coleman said Sept. 15, responding to a wire service report of the offer.
“However, given the recent revaluation of the cellular group and the S&P 500-both down 15 percent during the past two months-and Vanguard’s recent decline to the $18-$20 range, the stated purchase range may be a realistic starting point for negotiations.”
For pessimists, concern about equity-market impact on mergers might seem justified by last week’s cancellation of the Tellabs Inc./Ciena Corp. merger due to an overall three-month decline in share prices-Ciena’s more than Tellabs’. However, this news follows another rule of mergers and acquisitions, that 90 percent of cancellations are due to the seller’s business problems, Thrasher said.
“This was a one-for-one stock deal. Ciena didn’t get an AT&T (Corp.) contract, it lost a contract for Digital Teleport Inc. to Pirelli (Cable & Systems) and had disappointing third-quarter results,” said Sanjay Jindal, communications industry specialist for Houlihan Lokey Howard & Zukin, Los Angeles.
According to published reports, one of the concerns about Ciena is whether the equipment maker can compete with bigger companies like Pirelli and Lucent Technologies Inc. Cisco Systems Inc., a public company that is major player in computer networking equipment, is moving into telecommunications and also seeks to compete with the likes of Lucent and Northern Telecom Ltd.
One analyst suggested that strategic positioning for competitive advantage, coupled with lowered valuations, provided a congenial environment for Cisco’s Sept. 15 announcement that it would pay $157 million in stock for privately held Clarity Wireless Corp.
One way to evaluate a privately held company is to use public companies of similar size in the same sector as an approximate proxy. Since small-cap public companies have taken a bigger beating than their big-cap brethren in the recent market turmoil, their asking prices may be comparatively cheap these days.
As to the strategic nature of the acquisition, Cisco said, “Clarity’s fixed wireless technology is the first to provide high-speed, reliable operation in obstructed environments, a traditional stumbling block for wireless network communications that require line-of-site paths between communications points.”
