Merger of Little-Known Telecoms May Mean Rival for Heavyweights
By Kim Hart, Staff Writer
Wednesday, September 19, 2007
Paetec Holding, a little-known
New York telecom operator, built its business selling phone
and Internet services to corporate customers.
Iowa was battered by the 2000 telecom market crash, twice
forced into bankruptcy and major rounds of layoffs.
Paetec's $557 million bid this week to acquire McLeod could make
the combined company one of the largest rivals to AT&T and
Verizon Communications in selling services to businesses.
The business market is one of the most profitable for phone
companies as the number of residential phone customers dwindles.
Paetec and McLeod would also compete for business with
Sprint Nextel of
Reston, serving most metropolitan areas, including the
Such mergers have become increasingly common over the past few
years as independent carriers try to compete with the dominant
incumbent companies, which have grown through their own
"Companies like Paetec are arriving at the realization that they
need coast-to-coast coverage in order to compete," said Craig
Clausen, an analyst with New Paradigm Resources Group, a
The deal would give Paetec access to McLeod's $2.5 billion
fiber-optic network in 20 states, an asset Paetec says will
offer faster Internet speeds to a wider range of customers.
Paetec said it will be able to serve 47 of the country's largest
50 metropolitan areas.
The acquisition, which the companies hope to complete early next
year, comes as many independent carriers are fighting
potentially adverse regulatory changes and fierce competition
from much-larger rivals.
Federal Communications Commission is considering, in some
markets, allowing regional giants such as Verizon, AT&T and
Qwest to raise rates they charge companies like Paetec and
McLeod that depend on leased lines to reach their customers'
AT&T, Verizon and Qwest argue that smaller carriers benefit from
artificially low, government-set rates for leasing their
The smaller carriers, including
XO Communications of Reston, Cavalier Telephone in
Richmond and McLeod, are demanding that the FCC clarify its
rules governing pricing negotiations. They are hosting a press
conference today in Washington. These companies say they will be
forced to pass on higher costs to customers if the regional
carriers are allowed to raise the price of network access.
McLeod, for example, said Qwest's proposed rate increase in
Omaha could force the company to pull out of
"When one player controls the facility and there's no break on
pricing, they can squeeze out competition very easily," said
McLeod chief executive Royce Holland, whose position at the
combined company has not been determined.
XO and Cavalier are among dozens of companies that formed in the
Washington region after the passage of the Telecommunications
Act of 1996, which opened the local phone market to competition.
Those upstarts garnered billions of dollars in investment.
After borrowing too much money to build expensive fiber-optic
networks while not securing enough customers, many of the new
companies filed for bankruptcy protection or sold assets. McLeod
carried $4 billion in debt before it filed for bankruptcy
protection for the second time in 2005 and went private. In
March, McLeod announced plans to sell shares to the public again
but instead accepted Paetec's offer.
With its purchase of McLeod, Paetec expects annual revenue of
$1.6 billion, making it the largest independent carrier,
Level 3 Communications and
Time Warner Telecom. Paetec, which was founded in 1998 and
primarily serves large businesses, hopes to assume McLeod's
roster of small- and medium-sized companies.
It is the second major acquisition for Paetec in as many years,
following its 2006 purchase of
US LEC of
But Paetec will face challenges, some analysts said. It could
take two or three years to integrate the companies and make a
dent in Verizon's or AT&T's sales, said Donna Jaegers, a
financial analyst with Janco Partners.
"They're still dependent on incumbent networks, which still have
significant market dominance," Jerry James, acting chief
executive of Comptel, a group that represents independent
Smaller carriers will eventually need to rid themselves of the
dependence on the regional carriers, said Clausen of New
"Some of the smaller guys want regulators to keep protecting
them," he said. "The question is, at what point do they have to
grow up and find their own solutions?"