The purchase of UUNet Technologies by MFS Communications could be the harbinger of a flurry of Internet service provider acquisitions by telecommunications companies and result in considerable cost savings for UUNet customers.
The $2 billion deal is expected to serve as a competitive asset against large telecommunications companies such as AT&T, MCI Communications, and Bell Atlantic, which are all invading the ISP arena. Industry observers speculate that Netcom and PSINet are also possible takeover targets.
Alan Taffel, vice president of sales and marketing at UUNet, denied that the acquisition was a response to competitive pressure from the telcos, though he conceded that the merger will help UUNet expand its service offerings and increase profitability.
"It wasn't a defensive response to AT&T and MCI," Taffel said. "However, we did believe that to get to the next level in our evolution we needed a better cost basis and access to a lot of capital."
According to analysts, the acquisition will strengthen UUNet's position in the deregulated and increasingly competitive telecommunications market, but the combined company might itself become an acquisition target by an even larger corporation.
The two companies "are great strategic partners, and they can offer a better combined product," said John Robb, and analyst at Forrester Research. "They'll probably be acquired at some point by a larger company in the telecom wars."
MFS currently maintains more than 213,000 miles of fiber-optic networks that provide local and long distance telephone service for 40,000 businesses in the United States and abroad. Like MFS, UUNet serves only business customers, offering dedicated, high-speed Internet access to more than 10,000 companies.
Within a year, UUNet plans to migrate the vast majority of its Internet infrastructure onto MFS's fiber lines, which would create the first Internet service provider to own most of its own network backbone. Even AT&T and MCI, which own the underlying lines for their backbones, lease routers, software, and other Internet equipment and services from UUNet for their dial-up connections.
UUNet will pass some of the resulting cost savings to its customers, though Taffel declined to say how much. "[Cost] will go down," he said. "Forty percent of our costs right now are in the local loop."